Establishment thinking

According to the Irish Times,

The pessimists argue the euro is going to collapse and that will make it all irrelevant, but these are the same people, from far right and far left, who urged burning bondholders, collapsing the banking system and refusing to accept the terms of the bailout.

So, if you are worried that the euro is facing an existential crisis and may be on the brink of collapse, if the right policy choices are not taken quickly, then you are on the far left or far right. Take that, Wolfgang Münchau! And you are also on the far left or the far right if you were not in favour of Irish taxpayers paying back unguaranteed bondholders. Take that, Morgan Kelly, Karl Whelan, and many others too numerous to mention! And of course, if you were in favour of not paying back unguaranteed bondholders, then this meant that you were either in favour of collapsing the banking system, or prepared to accept such a collapse as a consequence of the policies you were advocating (their wording is a little ambiguous here, but the last nine words of that quotation suggest that the former interpretation is what the IT had in mind).

(As an aside, who are these pessimists who argue that the collapse of the euro “will make it all (i.e. getting Ireland back to creditworthiness) irrelevant?” And should Irish policy makers not be thinking hard about what to do in such an event? Would it not be irresponsible for them to refuse to contemplate such an eventuality? And should we not be doing our bit to head off such an eventuality by pointing out to governments with more fiscal space than ourselves that the Irish experience clearly shows that even in a small, open economy the confidence fairy does not exist, and that a policy of generalised eurozone austerity will be disastrous?)

Nice to see such rigourous and nuanced thinking from the IT.

68 thoughts on “Establishment thinking”

  1. If you’d told me it was Stephen Collins I wouldn’t have bothered clicking on the link.

    “… they can have realistic hopes of surviving in office for another four years in office.”

    He’s not even trying.

  2. There’s a breakdown in the western world since the club of Rome days – why are you surprised ?
    If Banks just extract capital for 40 + years eventually the stuff will run out ,Yes / no ?
    Mike Griffen formally of NASA Invokes Mark Twain to explain this stuff for dummies.
    http://www.youtube.com/watch?v=S503nFnu-EY

    Talk about Bondholders and all that lark if you want – its just a reflection of the physical breakdown crisis.

    “there are some plans which are so stupid that you know that plan will not come to fruition – you may not know what actually will occur ……… it does not pass the sniff test.”
    Criminals are at the Highest level of Governance – its that simple I am afraid.

  3. Stephen Collins is Ireland’s Comical Ali/Dr Pangloss. Whomever he perceives to be the establishment: he toadies up to them and writes that all they do is for the best.

    This is one of the problems with Ireland being small, and we really need some journalists unafraid of controversy in the political lobby.

  4. @ Kevin

    You also should have put in the following paragraph

    “They are now arguing for “debt forgiveness” across the board, as if that was a feasible option. The public have a far shrewder appreciation of the complexity of the issue than most of the self-appointed experts. According to the recent Red C poll, only 12 per cent of people thought the State should forgive debt for everyone and the vast majority said it should only apply after thorough means testing and on ability to pay. In reality that is what is happening already.”

    Who is arguing for debt forgiveness across the board? Not Morgan Kelly? Not me? Collins should list names rather than use the weaselly “some people” or “self-appointed experts”.

    As for “in reality that is what is happening already.” Well, no actually. This is apparent from the tiny loan loss provisions that have been taken by the banks on their mortgage portfolio.

    But don’t take it from me. Here are some quotes from Patrick Honohan has said

    http://debates.oireachtas.ie/FIJ/2011/09/02/00003.asp

    “It is clear that many lenders have been slow to acknowledge the extent of this problem and to put in place sufficient operational infrastructure to deal with it. ”

    “Banks must put the framework and resources in place to examine the individual cases of distressed borrowers and the sooner they do so the better.”

    “Banks need to work harder to bring a wider range of options for dealing with affordability to bear on this problem, particularly to take account of individual cases where there is little prospect of servicing the original loan terms.”

    Of course, we should expect nothing different. Collins has supported every government party line since the crisis began from the bank guarantee to NAMA as “the only game in town” (remember the “opinionated economics lecturers”) and has consistently insulted anyone who has dared to question whatever he hears from his government sources.

  5. @ Desmond Brennan

    “This is one of the problems with Ireland being small, and we really need some journalists unafraid of controversy in the political lobby.”

    To be honest, I’m not sure it’s just a small country problem — there is plenty of that kind of stuff in Washington DC. I think it’s a general problem with media.

  6. … there is plenty of that kind of stuff in Washington DC.

    Indeed; consider what Duncan Black had to say about David Broder in 2007:

    We normally think of “High Broderism” as the worship of bipartisanship for its own sake, combined with a fake “pox on both their houses” attitude. But in reality this is just the cover Broder uses for his real agenda, the defense of what he perceives to be “the establishment” at all costs. The establishment is the permanent ruling class of Washington, our betters who know better. It is their rough agenda which is sold as “centrism” even when it has no actual relationship with the political center in a meaningful way. Democracy’s messy, in Broder’s world, and passionate voters are problematic. It is up to the Wise Old Men of Washington to implement the agenda, and the job of the voters to bless them for it. When the establishment fails, the most important issue is not their failure, but that the voters might begin to lose faith in and deference for their betters. Thus, people must always be allowed to save face….

    Stephen Collins strikes me as a very similar sort of character. Indeed somebody like Broder may well be his ideal journalist. Part of what gives rise to his sort of commentary is the fact that, without access to the establishment, somebody like him has nothing much to say (on economic issues anyway). In contrast to the bloggers here, for example, Collins could never do any analysis of his own. So the deal is that he gets to be a loosely-attached part of the establishment in return for disseminating the establishment view.

  7. @ Karl Whelan

    “who is arguing for debt forgiveness across the board?”

    David McWilliams for sure. His argument is that the middle class are being denied by negative equity the “feel good” factor that is the engine of a modern economy. David is not really interested in distressed borrowers, even if forgiven these people do not drive our economy.

    Gurdgiev is also in this camp as the following Sindo quote illustrates.

    (Gurdgiev) Pointing to the direct impact the servicing of this massive debt was having on the middle class, whom he described as the “main productive part of the economy etc.

    You are in a minority of one in saying that Morgan Kelly, in citing his €6bn cost, was merely advising us of what we already knew from the PCAR and not some additional taxpayer costs. Indeed in the same Sindo article quoted above Gurdgiev said he was right behind his colleague MK and we know Gurdgiev is a doctrinaire debt forgiver.

    Stephen Donnelly and the Technical Group are most definitely advocating broad based debt forgiveness. His argument is that there are three parties “to blame” for negative equity, the borrower, the banks and the State. The burden should be shared accordingly i.e. people in negative equity should have two thirds of it forgiven as a moral imperative irrespective of their ability to pay.

  8. @ BW2

    Like I said, Collins should name names.

    In relation to your idea that Morgan hadn’t heard of PCAR, I just don’t know where you get that from so I don’t have anything to say about it.

    And perhaps you should read the article below in relation to whether he was calling for a blanket writedown.

    http://www.independent.ie/national-news/families-in-modern-ireland-skip-food-to-pay-the-mortgage-2859883.html

    “Responding directly to the claim made last week by the Tanaiste Eamon Gilmore, amongst others, that he had called for a “blanket write-off of mortgage debt”, Prof Kelly stated that the “purpose of debt forgiveness is not to eliminate negative equity, but to deal with the risk of people defaulting on smaller mortgages and losing their family homes”.

    Referring to these troubled homeowners specifically, he said: “By identifying the people at risk and reducing their mortgages to manageable levels, or, in the case of the unemployed, renting people their homes as effectively council houses, the State can save itself huge losses on fire sales of foreclosed properties and end the anguish of many ordinary Irish families.”

    Commenting on what he believes should be done to assist those in trouble with substantial boom-era mortgages, he added: “A few families with absurdly large mortgages will need to be given assistance to relocate to more affordable property, but they are a small part of the problem.”

    Prof Kelly dismissed outright the introduction of any form of mortgage debt relief for those in negative equity, but who could still afford to pay.

    “However, the large majority who can afford to pay their mortgages must pay every cent; regardless of how much they are in negative equity or may now regret their purchase,” he said.”

  9. @ Philip II

    My posting was largely a citing of observable fact. Perhaps you can point out were I am mistaken rather than taking smart ass swipes.

    @ Karl

    MK and to some extent your own position on this confuses me somewhat and has certainly been interpreted as supporting some form of broad based debt forgiveness. However, you are sticking to your guns that neither you nor MK were recommending any significant incremental approach to the debt management issue, so I will not engage you again on this matter.

    However McWillaims, Gurdgiev and Stephen Donnelly &the Technical Group are unambiguously notable supporters of blanket debt forgiveness over and above asking for a more humane treatment of “can’t pays”. You have asked a question, I have provided the information you requested.

  10. Gimme a break from Establishment Journalistic Pets, Saintly Columbanus Randite Advocates, and preening Orchard_E-Kon_omics please …

    Back in the real world …..

    ‘CUTS TO fuel, electricity and phone allowances for some 630,000 social welfare recipients have come into force from this week.

    The cuts to the household benefits package and the fuel allowance will reduce payments to pensioners and other social welfare recipients by almost €20 a month and up to €35.29 during the winter months. […] … those in receipt of these contributions will receive €8 less towards electricity a month and €8 less towards their monthly gas allowance.

    http://www.irishtimes.com/newspaper/ireland/2011/0910/1224303851598.html

    Great little republiK – where more pensioners will die from hypothermia this winter …. RAGE will probably keep Blind Biddy a little warmer … [this this will be the 7th time one of the most vulnerable members of society has had her ‘capital’ expropriated in the name of so-called Austerity …]

  11. @Brian Woods II
    I am lost Brian – where is the wealth ?
    The wealth is still present although degraded , if you put off real decisions to pay impossible debt contracts that are private in nature you will not stop the bleeding of wealth as depletion dynamics / exponential interest dive deeper into the abyss.

    Your linking of debt to wealth is muddled at best.
    Your track record in predicting where this will end has been abysmal – I hope you are just a illogical debt creature.
    Free your mind from the debt prison – it would be healthy at least for your remaining wealth if not for your sanity – as I fear too much truth would be a shock for such a delicate bank flower.
    Last ditch desperate debt management excercises does not create any wealth !!!! shock horror I know – its just poor accounting Brian , let it go…………….

  12. Fact 1 – ECB

    The unelected and undemocratic force of the ECB Central bankers club took it upon themselves to dictate policies throughout Europe, break their own rules, and regardless the evident failure of their policies enforced them nevertheless.

    Not a fact, for the moment, is the suspicion that these policies are influenced at large by vested interest groups.

    Fact 2 – BIS

    The proposed actions since 2008 did not put the monster back on a leash, on the contrary, more obscure financial instruments hit the market, and without a blush in May this year Deutsche Bank proudly announced to have arranged a 1,0 Billion bet for hedgefund manager Paulson on climbing Oil and Gold prices.

    http://www.businessinsider.com/john-paulson-gave-deutsche-bank-1-billion-to-invest-in-gold-and-oil-2011-5

    Fact 3 – Demonizing of Critics and the Media

    The exclusion of other views, hence a totalitarian enforcement of policies, can be traced back to the early days of policy makers in the crisis. In Ireland it started with rhetoric such as ‘There is no other way’. Similar phrases were hammered down for weeks through the media outlets.

    It is the reflection of an overwhelming, and in my view unhealthy, political force in Europe. The European Peoples Party, dominating all three, Council, Parliament and Commission.

    The political landscape in Brussels is dominated further, or perhaps better to be described as besieged by overwhelming lobby power. This lobby power is at the root of the problem that causes a dysfunctional democracy, leaving nothing but a shell, a skeleton of a once great idea.

    By scaremongering the rather uninformed public into a mindset that those who are critical on the policies prescribed are to be found in the extremist sections of society, the great social divide and conquer politics continues to paralyze the public form having a real debate and getting involved. Fear is the weapon of choice in this war against citizens and it is used daily.

    The left-right demonizing of critics is as useful a contribution to the discussion as is the Glenties Summer school of self appraisal before they leave into their summer break.

    Thanks Kevin.

  13. The feeling is mutual – but I suspect there must still be a altruistic bone somewhere in your body so I will keep banging on.
    Even if not – rationality has a nice habit of saving your ass unless a fight or flight response is called for.

  14. Straw man alert:

    “In terms of international reputation Ireland is beginning to put clear water between itself and Greece”

    I remember ministers going on about Ireland not being Greece but it was always an odd comment. Both countries are shut out and have elevated spreads vs bunds, but there the similarity ends. The reasons for Greek insolvency and Irish is it / isn’t it insolvency are very different as is the scale of the indebtedness.

    Establishing that Ireland is not Greece is an easy win to say the least.

    This bit:

    “The pessimists argue the euro is going to collapse and that will make it all irrelevant, but these are the same people, from far right and far left, who urged burning bondholders, collapsing the banking system and refusing to accept the terms of the bailout.”

    is on face value a quite pathetic attempt to twist the debate.

    However I don’t think Stephen C is thinking about the more thoughtful contributions Kevin thinks he is. I suspect he is judging others by his own standards and suspect he more has in mind less subtle interventions from Joe The Peepol, Constantin Studio etc.

    It is essentially a pointless article.

  15. Isn’t it clear enough now what has been happening — the far too loose monetary policy in the periphery pre-crisis, the tightening post-crisis, the wreckless lending to the peripery by core banks pre-crisis and the determination keep all of the debt firewalled in the periphery post-crisis to protect core banks… and we are still reading this stuff in the IT!

  16. @ Karl

    Apologies for breaking my promise so soon. I read that Sindo article again. I can see that Morgan is most definitely not in the McWilliams/Donnelly/Gurdgiev camp even though the last professes to be very much in the Morgan camp.

    If Morgan is not proposing any incremental costs over and above PCAR but merely a more humane approach to those who feel forced to live on cornflakes (despite the impressive array of supports already in place to prevent this), well we can all drink to that, can’t see why there was such a media fuss.

    Back on topic, yes I can see the similarilty between Collins and myself. My broad support for the establishment line is not motivated by ideological or party political considerations but simply a recognition of the real world. In fact I almost support the official line precisely because it is the official line, after all they are much closer to the issues than me.

    In opposition, FG and LAB indulged many of the populist looney tunes but now, faced with the reality of execution, they have, thankfully, drawn in their horns, big time. If Noonan backs down on the Anglo unsecured unguaranteed seniors it will be a further and very high profile capitulation to realpolitik, EU style.

  17. @DOD
    The thought struck me that the cuts to the vulnerable which will save 65m in a full year could be covered for 12 years with the money we are about to hand over to bondholders in Anglo in November.

  18. I don’t know anyone who urged or wanted the banking system to collapse, thats surely a mistake by the jouranilst, only anarchists would want that.
    Iceland still has a banking system by the way.
    So even if most of our banks went under we would still have had a banking system.
    The banking system Ireland currently has is hardly something to boast about – 67 billion of emergency funding from the ECB last month up from the month before.

  19. Collins

    Many of those who are railing against the modest €100 property charge would probably make far less fuss if €1,000 a year was loaded on to their income tax bill and simply deducted at source.

    A pol corr who doesn’t remember the PAYE marches. Or am I that old?

  20. In today’s world, if you don’t hold to the most dry, unimaginative, and orthodox party line, you are a complete crank who must be ignored at all costs. The “establishment” is really just the dominant group of extremely indolent people, perpetually in denial about the state of the world economy and financial system, unwilling to accept the reality of the changed would around them.

    This is a huge problem, and especially so in Ireland. There is a an entire rump in the economic commentariat who is prepared to defend the consensus fantasy that everything is really OK and that nothing really bad can ever actually happen–no matter what. It smacks of the logic of a young child, old enough to understand evidence presented to them, but naive enough to believe that there will always be a happy ending. Frankly, I sometimes wonder if people like Mr. Collins still believe in ghosts and Santa Claus.

    Not that I’m a great fan of his, but Kevin Myers has referenced this “delusional” aspect to Irish public life, where Irish civic society is incapable of discussing things in a frank and responsible way. We always turn to emotion, or denial, or fantasy; and usually, we tend blame the messenger.

    This is a massive problem, and has contributed very significantly to our current woes. Tackling it will be a major struggle. However, the best people to start doing so, indeed the people who have the most power to do so, are newspaper editors. The editors of all our national newspapers should demand more from their columnists.

  21. @Ceterisparibus
    Its a tired debate but even now we just don’t know who these people are(apart from Senators Norris use of parliamentary privilege) – the crisis is a good thing as it has exposed the real chain of command or at least proven where it does not reside.
    For that we should be grateful – we can walk through the rest of our lives at least knowing the entire western artifice is a cruel joke and perhaps always was and always will be.
    Such knowledge is precious & fleeting as soon the history books will become silent on the topic.
    But we few we happy few have been blessed with Kingly knowledge.

    http://www.youtube.com/watch?v=MN2fNLesZVY

  22. @Chris
    Have a Banking system is as important as the most vital of utilities but that does not mean you need a credit system.
    The two are not always the same thing.
    Private credit monopolists are a poison and a pox – whatever advantages that come from such a system do not outweigh the disadvantages of a Full scale all money system –

  23. On the point about left and right being the places where you find opposition to the establishment line, here is a link to the Newsnight programme from a couple of weeks ago that focused on this. It is fronted by an old time Thatcherite but don’t let that put you off, it is a thoughtful piece and hits a nail firmly on the head. It should be on interest particularly to economic historians.

    http://news.bbc.co.uk/2/hi/programmes/newsnight/9576473.stm

    I think you can trace the point at which capitalism lost its way back to the late eighties when dozy banks with – what seemed to the partners (their own capital was at risk, so risk was always very carefully managed) that ran the pre-big bang shops, infinite amounts of capital – bought up all the fascinating little financial markets houses. Now the banks have captured the political and economic process in the search for someone with an even bigger balance sheet to lay off the risk.

    It is the establishment that has lost its way.

  24. Watch the “conservatives” call for a halving of goverment expenditure to “save the west” while not riping up private debt contracts which will act to take the houses away from the sheep who bought them over the past 30 years – this may prove impractical however
    But this soap opera will just get better and better.
    Unless the credit making powers of banks are taken away nothing fundamental will change – just constant pointless poltical shuffling back & forth to game the ever changing money supply.
    However maybe this is the last time to make a killing in the markets as all the sheep have been butchered rather then sheered.
    Maybe this truely is the end game ,probally not.
    Maybe true monetory reformers will get a say but it seems highly unlikely.
    Their voices were heard for a instant in the mid 30s but were drowned out by the Keynesians who wanted to “save the system” or the credit monopolists from themselves.
    My bets are them revaluing Gold to save their ass just like the last time but this will be much more dramatic revaluation.
    Got your Popcorn ready lads ?

  25. Look – don’t get carried away. In general, Irish journalists are not the greatest contributors to our society. Despite what they might think most people treat them with a deserved indifference.
    Irish journalists didn’t unearth the Child Abuse scandal in the Catholic Church (we needed Panorama to do that). In general Irish journalists didn’t unearth anything during the Celtic Tiger years (despite all that was going on)
    Irish journalists are incapable of attacking anything other than a few easy targets – mostly the post scandal church, the HSE and public sector. They are generally lazy, ignorant and bandwagon jumpers.
    I’ve used the “in general” piece deliberately because there are a few notable exceptions (but unfortunately relatively few)
    So – we’re at a global crisis. The secular Arab uprising is becoming islamicised (look at Egypt), the west is paralysed by this debt crisis. The world is becoming a very unstable place.
    It would be thoroughly foolish for Irish politicians not to make preparations in the event of a collapse of the Euro. Things are so uncertain now that all eventualities must be considered.

  26. @ OMF
    Couldn’t agree more. This is why we need The Dork. We all need people who will look at a problem from a weird angle and so see solutions we cannot see, they may be wrong sometimes but they are more necessary than the ranks of middle of the road can kickers.
    Love the work Dork!

  27. @Chris

    “I don’t know anyone who urged or wanted the banking system to collapse, thats surely a mistake by the jouranilst, only anarchists would want that.”

    Problem is that anarchists will never get themselves well enough organised to make it happen 😉

  28. @Hogan

    “Methinks there is another silent run on the banks…”
    Are you becoming Morganesque in your comments?

  29. @ Dork
    “The Germans attacked – we were in a hopeless position…..”
    Ah – the poor old Romans – wait til the Germans attack this time round……
    Different Romans – same outcome

  30. @ ObsessiveMathsFreak
    +1

    Does he still not realise that the banking system has collapsed and has some more collapsing to do. Does he not realise that people who know multiples of what he knows, have called the MOU a “surrender document’. Damien Kiberd amongst others for instance.

    Stephen Collins was never the sharpest tool in the box.
    During the false boom the media decided that they could play the yield curve by making it “happen” they drove the property hysteria to unimaginable levels. I remember talking to Jack Fagan and him telling me “it was very hard now (2 years ago) to find a good news story” after it hit the fan. They were still looking for them, in the forlorn hope that fire could be breathed back in to the bleak embers. Most of the time, there is collusion between the media and political parties. There is no holding to account only the most, as far as I am concerned, timid responses to what masquerades as political leadership past and present in this country.

    As for the Euro collapsing? It is much more likely that Germany will leave the Euro or grant themselves a stronger Euro as part of the two tier, two speed Euro. Stark stayed on board for as long as he possibly could.

  31. OMF and all
    Ireland is no different from most societies, the elites benefited from the craziness to 2006 and when they did, all was right with the world. Critics were begrudgers, whatever the merit of their comments, and the elites deserved their position because, well they are smarter than you or me.

    In the down phase, the narrative has to shift, kick the can forward and shut the critics up, especially those that were right. Offer armageddon scenarios for any policy that differs from those proposed by the elites. What is actually happening, however is that the elites are genuinely alarmed, they are using the time bought bybthe kick forward strategies, to consolidate their wealth and position.

    Today, the kick forward phase seems to be ending (the barely silent runs on EU banks are indeed likely occurring now). Greece will buckle soon and it looks like France and Germany will protect a rump union, with fiscal sharing, but abandon the periphery to it’s fate.

    Ireland has to plan urgently. The pressure to honor debt and deposit transfers that were established in Euros will be enormous, even if Ireland returns to the Punt (or whatever the new new will be). So de list will be immediately denominated in punts, but debt will be denominated in euros, a massive massive theft from Ireland’s taxpayer. Ireland’s government will have to get ahead of this, link deposits with debts and force a devaluation of both….that is going to be extremely contentious, because to destroys German/French banks.

    Of course all of this is conjecture, based on Franco German initiatives recently, christine lagarde’s comments and the recent moves from the Swiss CB. Neither I nor anyone knows how this will play out, but we do know that europes banks are very exposed to our debt and to Spain’s Italy’s Greece’s and Portugal’s) they won’t go down without a fight.

  32. Frank Galton writes,

    Collins

    Many of those who are railing against the modest €100 property charge would probably make far less fuss if €1,000 a year was loaded on to their income tax bill and simply deducted at source.

    A pol corr who doesn’t remember the PAYE marches. Or am I that old?

    The other party, which is affected most highly by the balance between rent on land, and rent on labour in an economy, is the entrepreneur. We shouldn’t forget that in our loose mental calculations of expected outcomes. A society and an economy heavily taxed from the point of view of labour, will find it difficult to generate a decent level of growth to stem the corrosiveness of mass unemployment. In Spain there is up to 20% of the working population sitting on their fists, and children going to school with empty lunch boxes each day. In states such as California in the United States, where are people digging holes into the sides of hillsides to use as homes. These are first world, sophisticated economies. So one can only imagine what goes on in other parts of the world. BoH.

  33. Mis-wording apologises, should read, The other party, which is affected most highly by the balance between tax on rental income from land, and tax on labour in an economy, is the entrepreneur.

  34. Stephen Collins wrote,

    They are now arguing for “debt forgiveness” across the board, as if that was a feasible option. The public have a far shrewder appreciation of the complexity of the issue than most of the self-appointed experts. According to the recent Red C poll, only 12 per cent of people thought the State should forgive debt for everyone and the vast majority said it should only apply after thorough means testing and on ability to pay. In reality that is what is happening already.

    All that the Red C poll demonstrates really, is that most people on the island of Ireland (and anywhere else in the world that had a speculative property bubble), understood exactly the gamble they were getting into. The taxation on capital gains from land value inflation was non-existent, and if you could obtain the necessary finance to speculate to gamble, then you made absolutely no sacrifice whatsoever. You weren’t even gambling with your own money. I am so good now, at telling this story, I know I would have made a great sub-prime mortgage broker during the bubble in Ireland. I could have caught out a lot of poor sods, and capitalised on their most basic ‘animal spirits’. It is hardly a revelation to most people who understood perfectly the gamble to begin with, that it was in fact real pounds, shillings and pence, they had on the table. And not monopoly money after all. I would venture to speculate though, it was the sub-prime mortgage lenders, and bankers, here in Ireland who had convinced themselves they weren’t selling real money, and it was only the monopoly variety. That is the strangest part about the currently financial crisis. How it was the educated and informed who got star struck, and not the simple and the ignorant, as is often claimed. BoH

  35. BoH
    I suspect you are right that the “educated and informed” got fooled for a while, but not all of them and even those that were fooled were quick enough to understand the politics of decline when the turn finally came. The US government couldn’t find a secretary for the treasury for years ( bush appointed one disaster after another in Snow etc), then suddenly, Paulson volunteers for the job, ready and able with a series of well though out justifications for why government should assume bank liabilities.

    In Ireland, the government was quick to offer the guarantee and take Anglo Irish into it’s fold quickly, thus avoiding any unfortunate revelations about the individuals that borrowed from that esteemed institution.

    In the end, debt is about power and judges, banks, even journalists have some form of that. They use it to apply leverage to official power structures, so they can afford to get misty eyed about their monopoly money, because in the end, they can fight back…..

  36. If I may, finally add to the above: You weren’t gambling with your own money. Who cared whose money it was, as long as you made use from it, while you had the access to the same? A bit like borrowing a lawn mower from the guy next door, running it into the ground, and then forgetting to give it back. Real estate investment was the no-brainer, pre-packaged, off-the-peg investment opportunity for the masses to avail of. It was the borrowed equipment that every one could abuse. Everyone could be the ‘smartest’ guy in the room! As Andy Warhol predicted years ago, ‘In the future, everyone will have their fifteen minutes of fame.’ The only thing that went wrong in Ireland, is that too many tried to avail of their fifteen minutes at the same time, and the switch board jambed. Today, no one in Ireland has a dial tone and the telephone company has gone out of business. No more free lawn mowers for anyone. BoH.

    http://designcomment.blogspot.com/2011/09/fifteen-minutes.html

  37. Bklyn_rntr wrote,

    The US government couldn’t find a secretary for the treasury for years ( bush appointed one disaster after another in Snow etc), then suddenly, Paulson volunteers for the job, ready and able with a series of well though out justifications for why government should assume bank liabilities.

    Gotcha, excellently made point. A top man from the mile high club, was appointed to go in, and do the dirty. You gotta respect the gumption, don’t you? I’ll bet Paulson had bargained for at least some form of a resistance from the left though. Instead, he got a clear walk into Gadaffi’s bedroom. Is this why the experts claim, that Obama, is not the one? BoH.

  38. I don’t know if you agree, and I worry that it sounds like lunacy…but I find it hard to believe that GS didn’t understand the extraordinary leverage the system was creating. This was the bank that created some of the most toxic CDO products and then created the synthetic CDO’s.

    Synthetics were particularly magic as they allowed GS to sell CDS to one customer and CDO’s to another because a CDs is a mirror of a CDO. They could skim a fee off each side and still claim that it was acting in the best interests of each side. And when it blew up…..lo and behold…..AIG is bailed out, because Goldman insisted that AIG pay margin while Paulson was Treas. sec…

  39. Significantly,the I.T. no longer permits comment from readers on Collins’ pieces – savaged on a few occasions during the tenure of the last administration…..

  40. There are many opportunities for dissecting media commentary but Stephen Collins has had the honour of having a number of specific threads opened on the IE blog. It’s hardly that others haven’t made crackpot proposals in recent years.

    The camel of course seldom sees his own hump and groupthink is not hard to find.

    Despite the consequential decision on banking that was made on Sept 29/30 2008, without apparent regard to downsides, in recent years several proposals of huge potential consequence have been made but outcome scenarios are rarely if ever discussed and individuals need not fear being forensically challenged in the broadcast media.

    “What I suggest to you and what I ask you is this, would you not consider taking up the default gauntlet, and in a structured way if necessary saying yes, default is not a negative, default is a positive, because believe me, the markets believe it is inevitable,” Shane Ross said to Enda Kenny in the Dáil last July.

    That is a valid argument to make but when I looked at two charts in a print issue of The Sunday Independent in early August, where the same argument was made, it struck me how crazy it was – – one chart had per-capita income in Russia post default and the other had per capita income post default in Argentina.

    As to ‘establishment’ thinking, apart from politicians and senior civil servants who get special gilted retirement packages, who else among the insiders, would be included?

    A 3-year fiscal plan is to be published next month and note how quiet the vested interests have been in fear of losing bubble gains? However come November a truckload of ‘submissions’ will be dumped on Merrion Street pleading for Budget largesse or exemption from pain.

    It’s true that the ‘confidence fairy’ doesn’t exist but while courage and sailing against the wind is demanded of politicians, the insiders, including academics, are silent on the huge gulf between the haves and the have nots. What we have we hold is the motto.

    What is very likely to happen is that a disastrous temp system will become the norm for young workers while those in secure positions will retain their gains.

    It has already been signalled for new public sector staff and Bruton has announced new terms for ‘agency’ staff — just like the start of the temp system in Japan in the mid-1980s.

    @ Frank Galton

    As for the tax marches, equity was one issue as the Government had reversed a planned levy on farm income.

    The trade unions then represented a bigger share of private sector workers; note how the huge number of unemployed is no longer a priority issue when most of the membership now have State guaranteed employment.

  41. @ grumpy

    Many thanks for the link to the newsnight item. The art of understatement.
    More than a million people on this island live under British jurisdiction. Irish have settled in big numbers all over the island of Britain. Intermarriage is common. Our domestic trading and culture is deeply interlinked. We can, and should learn from Britain’s experience.

    Thatcher could not have been more wrong when she said ‘there is no such thing as society’. The truth is that no economy is conceivable outside of society. Karl Polanyi had it right.

    Thatcher got her opening because the institutions then representing society, such as parliament, executive, nationalised industries, unions etc had accumulated too many vested interests. The Labour movement had been captured by its own cadres and was unable to reform itself.

    Thatcher’s Schumpeterian wealth destruction didn’t really lead to the brave new world, and the remorseless decline in middle class job security and working conditions has paralleled the US. Media penetration of government proceeded apace, and the underclass grew in size and complexity.

    In retrospect New Labour was mostly theatrics and puff. The stirring speeches, the Big bang, the military adventures, the housing bubble and the PS managerialism were all distractions from reality. Result, people have lost faith in politics and political leadership.

    As Charles Moore said in closing ‘‘Britain is morally and actually (financially) bust’ . Fair play to him for naming it. This is not just about fiddling around with QE and hoping for the best. The social contract needs to be renewed.

  42. Excellent debate folks.

    I’d say Dork hasn’t even scratched the surface of his video repertoire. Cork is, of course, the home of entertainment 🙂

  43. @Philip II
    Because the poo-poohing of the anti-green jersey fascists/communists [delete as appropriate] comes to the fore at a time of great stress in the banking system. The metatron of the financial services industy and the great and good (eating each others tails) has his spake.

  44. Bklyn_rntr wrote:

    They could skim a fee off each side and still claim that it was acting in the best interests of each side. And when it blew up…..lo and behold…..AIG is bailed out, because Goldman insisted that AIG pay margin while Paulson was Treas. sec…

    The main problem is, as you extend the amount of securitization financial products in a market, you basically end up with a lot of this kind of thing. It is quite simple. A corporate entity, or sovereign, or whatever can raise finance for its debt by selling bonds, which it may pay back incrementally over time – and may continue to do so – even those revenues and profits of the said entity may go up or down. That is, it can continue to pay the bond coupons, even though the corporate entity or sovereign may be healthy or not, at one time or another for the duration of bond. It’s a very different matter with securitization however. You are selling the rental stream, or whatever it is, from several ventures be they mortgage loans or whatever. Apart from the fact, that a GS bank may not have originated the original loans, the fact is that if anything goes wrong with the underlying bundle supporting the securitization product – even for a short period of time – then the whole product blows up. And when one of them blows up, it sets off the ones around it, and so on.

    People in Ireland nowadays are very, very quick to criticise bond holders, and the whole concept of bonds perhaps, but the fact is, as a mechanism they have some built-in shock absorption capability. Maybe we should be glad of that, I don’t know. I guess, the question one must ask is: If all of the million plus mortgages in Ireland had been simply bundled together and split up and sold around the markets of Europe, and then sold on further afield – without having the intermediary of the Irish banks at all – our Irish banks who try to service bonds purchased by the French and German banks, who it make any difference. I often wonder about that. Were the many institutions selling mortgage products into the Irish market, surplus to requirements? Would Ireland be better off, if GS or someone acquired the mortgage bundles from some regional brokers, and we were set with the task now of servicing securitized products now, rather than all of this ‘bond’ paper that Irish banks issued during the boom. As Colm McCarthy pointed out, it may be the blurring of distinction between the private debt of banks, and the sovereign debt of the Irish state – may be something that buyers of same sovereign debt – feel very dissatisfied with today. BoH.

  45. “People in Ireland nowadays are very, very quick to criticise bond holder”
    no, I think people are quick to criticise them being paid off with taxpayers funds. Slight difference.

  46. I don’t think Margaret E Ward writes for the Irish Times anymore but I could be wrong as I have not bought a paper in a while but this is a fantastic little ding dong from a few years back.
    Manseragh was always good for a laugh if nothing else………….

    http://www.youtube.com/watch?v=u1lmuqy6G_E

    Margarets a great girl.

  47. boH
    Criticism against bondholders that seek to be paid for risk on an ex-anti basis, but then refuse to accept the risk on an ex-post basis, are justified IMO.

    That said, your point is a good one. Had Irish mortgages been sliced and diced into CDO’s then things would be even worse today. The US banks under priced the cost of mortgage servicing and they sold the debt to third parties who where separately funded by those same banks. The dirty secret is that there was no risk offlay in the system.

    A hedge fund running a 4x leverage is borrowing 80% of its positions and if those positions are CDO’s, then a bank is offloading one risk to assume another. This was never looked at.

  48. @Bklyn
    Think she is originally from New York with Irish parents – but I guess the Dublin 4 accent is very transatlantic I suppose
    Accents are a funny thing anyway – they change through the generations.

  49. Bklyn_rntr,

    I’d like to get into a discussion about north America and the use of instruments designed to do risk lay off’s and so on. But I really lack the technical insight into the mechanics of finance. However, I do understand the point, that many of the instruments did function in ways they were meant to. In that, they did distribute risks more widely across the whole globe. Unfortunately, the way they were abused, meant we didn’t all get the omelette we would like. That is Robert Merton’s point, that we aught not to ignore the very many applications in which even the most derivative contracts, can be used for a lot of good. The fact they were wholesale abused, and possibly by folk who come from a legal background, rather than a mathematical one, speaks for itself. There is one good scene from the West Wing TV series, in which Sam Seaborne (who later ended up as the White House deputy communications director in the series), walked out of a meeting at his law firm, in which he was helping clients from the oil industry to protect themselves legally when buying a fleet of twenty year old, single hulled tanker vessels. His clients were so impressed with their young lawyer. We have never paid less for a fleet. Outstanding!

    I don’t know if the book or TV series has ever been created yet, with sufficient input from those who understand the mechanics, to shine a light on how such deals were constructed for mortgage backed securities. But I would imagine, we are back to the same idea, of the twenty year old, single hull vessel, without a modern navigation system to ferry toxic cargo on the rough high seas. As Seaborne remarked in the TV series, the reason they are so cheap, is because no one wants to buy them. One of the professors from the London School of Economics made this same point, in one lecture I recall listening to. Some of these ‘products’ offered such an amazing return for such a low buying price, that surely some of those buyers from Europe must have known what they were handling. It is that simple.

    My question about the Irish situation is simple. What exactly does the intermediary function of what is known as an Irish bank, still buy for us in 2011? Or for that matter, what exactly did it buy for us, that a simple securitization product could not provide all through the decade of the 2000’s? I mean, what extra teflon, bullet proof, padded protection did six native and a couple of non-native banking institutions really offer the nation of Ireland? Except to tie the private debt of those institutions to the sovereign, in some sort of fantastic mix-up. Would we have been better off all along without the extra expense of a bullet proof jacket? Would we have been better off running vest-less? That is, with Goldman Sachs as our intermediary to the outside credit markets and a wheel barrow load of securitization products? Rather like Iceland’s banks did with UK investors. I’m not advocating it as a general policy. But does anyone know what our Irish banks provide us, that is extra and any better? I’d love to hear a good answer to that one. BoH.

  50. There is a received wisdom that “spreading the risk ” is a good thing. The argument is that one person’s big loss is worse than a whole lot of people’s small loss. We can now see that this was hopelessly misguided in the case of securitisation etc. Instead of having isolated big losses we finished up with a contagion of smaller losses which threatened the whole system rather than the affected sector.

  51. And that is the point..there was supposed to be risk offset but there wasn’t. Instead there was risk reassignment…I have read many pieces that go through the process ( check out the late Tanta’s ubernerd posts on calculatedriskblog.com) and describe how they functioned, how they were abused outrageously and how they failed.
    The problem with these structures is that they harden positions. Those that buy them, are usually leveraging the capital the use to take them on. On the other hand, those that insure against their failure often don’t have any exposure to the underlying asset, so they actively want to see default. The end effect is each side plays for a win, the chances of a fudge ending (can we agree of 70% of face) are lessened to almost zero.

    In Ireland’s case, I fully believe that the system is better off without these products because, had they existed then stakeholders with CDS positions on Irish mortgage debt would sue to force default in order to get paid out. The only “kick it forward” strategy available to government is to make everyone whole (this is what the US did when it bailed out the banks and then AIG too).

    Transferring private sector debt to the sovereign is completely unacceptable in any system that pretends to be capitalist. when Greenspan and his crew talk of deregulation and allowing market mechanisms work on the one hand, but then declare that the ultimate market mechanism, bank failures, must be prevented on the other they show themselves to be dangerous liars.

    Despite this, there is one advantage to not having leveraged loan type products, and that is that sovereign debt contracts are regulated by national governments. So if/when a default or restructuring occurs, then the sovereign has enormous power to dictate the terms of the restructuring. A CDO/CDS type contract is usually placed under a different jurisdiction and that reduces the sovereign’s negotiating power.

  52. Bklyn_rntr,

    Thanks for the response. The above sheds some more light on it for me. In particular, thanks for making the point about insurers of the derivative structures. It’s a subtle point and one I need to think about, along with the idea as you explained of the financial leverage used to buy the products to begin with. Clearly, there are quite a lot of moving parts to this, but it would be straightforward to those in the trade. I brought in the analogies of the leaky tanker vessel and the borrowed lawn mower above, to illustrate some kind of picture for others here who may struggle to visualise the set up. Your explanation is very helpful. BoH.

  53. Karl says

    ‘So that’s why I dislike the Sindo’s coverage of public sector pay. It leads its readers to believe that there is a simple single bullet solution to the deficit and, via that logic, to a demonsation of a particular group as the cause of our problems’

    That is a net point, and a fair one in my view. As Colm McCarthy points out, the public sector is a varied landscape, where some employees are far from well off. Michael Hennigan makes some telling points about comparative international rates and calls once more for reform. Others posts back that up.

    IMHO, the core problem is the debilitated state of our republic. Senior public servants, including university heads, have been allowed to develop lucrative personal fiefdoms. A spoils system. The grip which these ‘bureaupreneurs’ have had on high level recruitment and public sector procurement has enabled them to move smoothly into the elite circles of influence traditionally inhabited by our propertied and professional classes. Way too cozy.

    This executive dominance, and accompanying governance vaccuum, has extended to the upper reaches of the unions, with a cascading series of cosy deals done under partnership to keep everyone sweet. One of the reasons ordinary PS employees aren’t stirring themselves, is the catastrophic decline in respect for management. The sweeties have run out.

    Further cuts cannot but deepen cynicism and alienation, and may well lead, as mentioned above, to a culture of moonlighting and backhanders. Anyone who imagines that this can be ‘managed’ should read Michael Lipsky’s ‘Street Cormer Bureaucracy’. The bedrock of public service is personal responsibility. When that goes, look out below.

    This problem goes way beyond fiscal issues. As Charles Moore said of Britain ‘we are morally and actually bankrupt’.
    http://news.bbc.co.uk/2/hi/programmes/newsnight/9576473.stm

    The challenge is one of reform. It doesn’t have to start at the top, but the top cannot expect to be exempted in the usual fashion.

    Dork rightly condemns the financial takeover of the real economy, and identifies the self defeating nature of austerity programmes. Anyone who reads Steve Keen or Bill Mitchell, or has any familiarity with MMT, knows that orthodox economics has been going down a cul de sac. None of that takes away from your original point.

  54. The Irish commentariat would should read and learn the lessons of Iceland
    http://www.irishtimes.com/newspaper/finance/2011/0611/1224298736664.html

    Iceland experienced an identical crisis to Ireland – deregulated banks borrowed too much money to finance a domestic real estate boom.

    When it all collapsed Iceland refused to guarantee the debt of non-resident bondholders, introduced capital controls and devalued their currency.

    Ireland adopted a classic orthodox approach which was widely supported by the journalist who wrote the above piece.

    Two years later Iceland are back in the bond markets and experiencing economic growth. Ireland adopted the orthodox approach (as though it were 1987) with explicit intention of re-entering the bond market. The Irish strategy failed and the Icelandic one succeeded – a brutal fact that cannot be ignored (and nor will it by economic historians).

    The difference between the two countries is of course – the Euro.

    The harsh reality is that international finance markets would find it much more difficult to cause a liquidity crisis in a country that controls its own currency than one that does not (hence the difference between Spain and the UK).

    So, although I do not support it, it is perfectly rational (more rational than the austerity fetish) to call for exit from the Euro to solve Irelands problems.

    Ireland is in the position of an emerging market economy that is issuing debt in a foreign denominated currency.

    The only journalist to face up to this reality and call a spade a spade is David McWilliams.

  55. “Nice to see such rigourous and nuanced thinking from the IT.”

    You say that like it happens sometimes.

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