Fiscal Causes and Consequences

A common narrative has developed that the euro zone crisis is being misdiagnosed as a crisis requiring a fiscal cure.   See, Larry Summers here, for example; or Paul Krugman here.  

I think most of us can agree that the Irish crisis was predominantly the result of an interacting property and credit bubble.   Rising property prices fuelled credit inflows, which in turn fuelled the property bubble.   What made the Irish property bubble ultimately so damaging was the fact that it was both a property price and construction bubble.   Usually a strong supply response can help deflate or at least limit a price bubble.   But the forces driving the price bubble were so strong that the supply response did little to tame it.   When it burst it led to both a massive wealth shock and a massive structural shock to the economy given the resources that had been misallocated by the bubble to construction.   This in turn led to a series of adverse feedback loops: banking, growth and fiscal.   The policy challenge has been so severe because policies to try to stabilise one element of the crisis – e.g. debt stabilisation – tends to make another worse – e.g. growth.   The interacting crises reached a second stage of severity once the banks and Government began to lose their creditworthiness.   Official support was all that stood in the way of complete meltdown. 

It now seems rather beside the point to focus on the fact that the original source of the crisis was not primarily fiscal.   (Even the idea that fiscal imbalances were not a major part of the initial vulnerabilities is exaggerated.   For Ireland, a large structural deficit was hidden by revenues directly and indirectly associated with the property bubble, as expenditure grew strongly and non property-related revenues lagged.  It is true that the design of the Stability and Growth Pact was poorly designed to identify this imbalance.   The new Excessive Imbalance Procedure should go some way to rectifying this.)  But whatever its cause, restoring debt sustainability and State creditworthiness is now an essential part of the solution to exiting the crisis.  

One thing that has become evident is how fragile creditworthiness is in the monetary union for countries with high debts and doubts about political capacity to achieve debt stabilisation.   Not having a domestic central bank available to print money as a last resort to repay debt and avoid default is a major source of vulnerability.   Euro zone countries have shown themselves to be subject to bad expectational equilibria, where concerns about default risk leads to high market yields, which can make the initial concerns self-fulfilling. 

Stronger mutual support mechanisms are needed to give vulnerable countries a reasonable chance of sustaining or regaining creditworthiness.   But stronger countries – who themselves have vulnerabilities – are understandably reluctant to take on large contingent liabilities and weaken incentives for fiscal discipline (moral hazard) without reasonable assurances of disciplined fiscal policies from their euro zone partners.   Even with beefed up mutual support mechanisms, potential bond buyers are also looking for strong fiscal frameworks to support the political capacity to work back towards debt sustainability and ultimately less vulnerable debt levels.   Of course, the solution to the crisis goes beyond the fiscal – a more growth-oriented response from the ECB, for example, would be hugely helpful.   But pointing out that the original cause was not primarily fiscal does not seem particularly enlightening or helpful in charting a way out. 

140 thoughts on “Fiscal Causes and Consequences”

  1. Glad to see you have changed your tune a bit John but quoting Larry , Curly but not Moe (who would be Moe I wonder ?) is not my style.
    Somebody somewhere will have to issue interest free fiat somehow so as to reduce the wastage.
    They can then tax those credit / oil sensitive structures (cars , oil central heating etc etc), and bleed the credit malinvestment from the system.

    This will direct activity into domestic commerce…. otherwise its Donkeys for Beamish as the medium of exchange.
    But it will be growth but not as we know it…… commercial activity will be concentrated in the cities again.
    Much of the outer suburbs & sub rural parts will be written off I imagine.

  2. I cannot believe that regulation was not restricting land use during the bubble. Tight planning regulation and high house prices go hand in hand.

  3. The surveyors red book may have to be revisited. My suspicion is, I havn’t yet proof, but the society of chartered surveyors, the property professionals, may be an organised cult,who are totally brainwashed and highly dangerous.

    Perhaps some of their spokespeople might like to comment.

  4. “But pointing out that the original cause was not primarily fiscal does not seem particularly enlightening or helpful in charting a way out.”

    The people who are charting the way out are the very same people who have diagnosed the cause of the crisis as fiscal overspending and irresponsibility. The only chart that has passed their scrutiny so far is the ‘fiscal responsibility’ chart.
    Krugman does suggest solutions but none of his solutions is acceptable.
    And he right about the suicide bit. There are incidents on a weekly basis.

    One wonders is there any hope that Germany will pull back from the destruction she is forcing on Europe.
    One also wonders if the Irish authorities are anywhere close to recognising the extent of the crisis and its effects on ordinary people and prepare an appropriate national response as distinct from the policy of protecting vested interests that has been at the heart of the response so far.

  5. Weaker mutual support mechanisms are needed to give vulnerable countries a reasonable chance of achieving real devaluations and forcing debt writedowns, thereby regaining creditworthiness.

  6. Larry Summers: “…..since for a country income is determined by spending, a country that pursues austerity to the point where its economy is driven into a downward spiral does its creditors no favour……But the prospect for success, politically and economically depends on the restoration of growth.”

    I would not in principle disagree with this approach as one alternative /tool in more “normal” distressed economic circumstances (consistently also put by Mr. Krugman). My problem is that continued spending & hence more borrowing in a situation where the country is now deeply and (possibly) irretrievably insolvent may result in some additional temporary growth (e.g. the stimulus effect of the fiscal deficit), growth alone will not resolve the deepening insolvency situation if that insolvency is severe enough (irretrievable). So I feel it is too simplistic for him to state that Europe’s “financial problems stem from lack of growth” alone.

    I have a similar problem with his statement “High deficits are much more a symptom than a cause of their problems.” Common sense says that there is a point of no return in continual deficits and related borrowing accumulation where lender confidence is negatively impacted and hence interest rates rise so far, for so long that insolvency is reinforced and subsequently reaches the irretrievable, downward spiral point. Also, someone has to lend the money that is to be spent. It is not unreasonable for lenders to expect borrowers to improve /delete over time unsustainable deficits in return for loan support.

    PK adds in inflation as an additional factor in solving the debt problems…..All helpful in reducing debt levels. However, one needs an awful lot of growth and inflation, and constructive, targeted austerity, to get anywhere near making an impact on the current economic woes of Spain, Ireland, etc. The problem is that the level of insolvency(ies) is so great as to be overtaking conventional tools. Conventional tools such as these have run into ideological and political barriers, mainly as a result of the level such tools would need to be operated at in the present circumstances.

    In the absence of a true ECB lender of last resort to print “inflation” and re-inflate growth (the N Europeans are naturally baulking at the scale of what would be required even with such an ECB), what’s missing and remaining is debt resolution in my view i.e. the rebasing, by write-down, of the insolvency levels to a sustainable, solvent base. Then more moderate growth, inflation, etc. are manageable tools.

    A problem, politically, in this argumentation is how to define the irretrevievable insolvency level for a particular country. However, it’s not so difficult to argue and define this in pure credit terms. “a country that pursues austerity to the point where its economy is driven into a downward spiral does its creditors no favour”. I agree with that, as would most creditors if faced with only downside alternatives. That is a fundamental rule of credit.

  7. Here’s the thing. Fiscal prudence is undenably a good thing. It leads to rewards and everybody is happy.
    But fiscal prudence is not the same as the policy they call Austerity. The policy called usterity is a policy of bailing out banks. The fiscal prudence piece is secondary to this. The policy called austerity has nothing to do with being austere.
    Austere is defined as “Having no comforts or luxuries; harsh or ascetic.” Now I don’t think that applies to bankers or bailed out developers – do you? I don’t think you could call Davos austere or the millions paid to Lloyd Blankfein austere – do you? So the word austerity is being used to disguise what is just a bailout of banks.

    This is a trick of language. We associate austerity with a kind of calvinistic approach to life. It taps into an innate understanding that there are times when we must make sacrifices for some better good. It’s the same psychological framework that lent and Ramadan tap into. It’s an innate human thing. And the greater the sacrifice the greater the good that is deemed to come from it. North Korea uses it. So it’s much better to call a policy of bailing out banks austerity.

    The no side in the referendum would do much better to say that “bank bailout is not working..” rather than austerity is not working.

    So after that ramble here is the point:
    You seem to be trying to convince yourself of something that you know doesn’t make sense. This started as a banking crisis and will end as a banking crisis. All this focus on fiscal rectitude while refusing to acknowledge that role of banking in the solution doesn’t make sense

  8. @ John McHale

    ”Not having a domestic central bank available to print money as a last resort to repay debt and avoid default is a major source of vulnerability.”

    I agree with this and I’m not trying to be pedantic but no significant amount of money is printed nowadays. It’s typed into an account.

    This is important because under the current system, new money is only ever typed into a computer as long as a debtor is recorded beside it.

    Central Banks can type money into reserve accounts. But only if commercial banks agree to be debtors.

    Equally, commercial banks can type new money into people’s current accounts, to a certain multiple of their reserves, but only if they have a signature from a debtor.

    Indeed, every digital euro has a corresponding debt. Continuing with this system would mean that any new money required to repay current debts would have a debt of its own.

    It’s hard to imagine any solution to this recession other the debt defaults but I’m surprised the solution of creating debt free digital money is rarely discussed.

  9. @ Eureka Fair point, which is why I have argued here and others such as Colm McC have also written before that the debt resolution should be targeted at the odious bank debt element. Fiscal prudence would also inherently involve sacrifice and saving for rainy days. All that is happening in this crisis is debt service & debt retirement everywhere, with consequential and escalating economic contraction.

  10. @eureka on John McHale’s commendably long post

    You seem to be trying to convince yourself of something that you know doesn’t make sense. This started as a banking crisis and will end as a banking crisis. All this focus on fiscal rectitude while refusing to acknowledge that role of banking in the solution doesn’t make sense

    +1

    Beautiful.

    The political and intellectual divisions at the start of the European component of the global financial crisis remain the divisions now, four years later.

    There are those who believe we need to sacrifice social democracy, the sovereignty of the peripheral states and popular democracy to save the Eurozone financial system and those who believe the Eurozone financial system is the problem.

    The Fiscal Compact is an attempt by the political right to win this battle of opposing ideological positions and class interests and ensure that it can never be fought again.

    It was the most amazing act of chutzpah by the neoliberals to try and make social democracy take the fall for the largest market failure of the last eighty years but they may well get away with it.

    If we vote “Yes” we will be voting to for a lie.

  11. Whoops. Misspelled closing html tag in my last post. Apologies.

    @eureka on John McHale’s commendably detailed attempt at a pro Fiscal Compact synthesis.

    You seem to be trying to convince yourself of something that you know doesn’t make sense. This started as a banking crisis and will end as a banking crisis. All this focus on fiscal rectitude while refusing to acknowledge that role of banking in the solution doesn’t make sense

    +1

    Beautiful.

    The political and intellectual divisions at the start of the European component of the global financial crisis remain the divisions now, four years later.

    There are those who believe we need to sacrifice social democracy, the sovereignty of the peripheral states and popular democracy to save the Eurozone financial system and those who believe the Eurozone financial system is the problem.

    The Fiscal Compact is an attempt by the political right to win this battle of opposing ideological positions and class interests and ensure that it can never be fought again.

    It was the most amazing act of chutzpah by the neoliberals to try and make social democracy take the fall for the largest market failure of the last eighty years but they may well get away with it.

    If we vote “Yes” we will be voting to for a lie.

  12. @ PF “It’s hard to imagine any solution to this recession other the debt defaults but I’m surprised the solution of creating debt free digital money is rarely discussed.”

    I’m beginning to think that it is going to require a Euro area without Germany (and perhaps one or two more), with the balance having an ECB that can reinflate the revised EZ economy. Hopefully a structured progression, rgather than unplanned /chaotic!

  13. The problem is all solutions involving more ‘pain’ are a tough sell as long as we’re getting screwed on the banking debt issue. I find in working life the no.1 most corrosive issue in a work place is unfairness. The same is true in society, it breads cynicism and makes citizen justify things like, not paying taxes for instance…

  14. @Paul W

    I’m beginning to think that it is going to require a Euro area without Germany (and perhaps one or two more), with the balance having an ECB that can reinflate the revised EZ economy. Hopefully a structured progression, rgather than unplanned /chaotic!

    I think we should be realistic and accept that the Euro has been Germany’s beast from the very beginning, if the peripherals plan to stay in it it will be under German conditions.

    We should therefore not be planning to stay in it unless we can engage in the kind of political alliance building that would not fit well with Fine Gael’s cordial EPP relations. A Germany free Eurozone would also have problems very similar to the German focussed Eurozone we have now – there are not the popular democratic European structures to keep any European central bank accountable. The very idea of independent central banks, of monetary policy setters somehow being like the judiciary, needs to be ditched.

    The Financial Times headline article for this evening nice captures the German position nicely:

    Berlin insists on eurozone austerity

    “The first precondition in order to have sustainable growth everywhere in Europe is fiscal consolidation,” Mr Schäuble said at a press conference with his Spanish counterpart, Luis de Guindos. “If now we talk about growth, it shouldn’t be understood as a change of direction. That would be a mistake.”

    Schauble with his expansionary fiscal contraction is his usual slightly fantastical self, the “Last European” who is determined to make everyone follow Germany’s lead. The German conservative position has an obvious element of domestic political positioning and national self interest but it also has a strong whiff of doublethink. Who can forget Schauble’s simultaneous demands that Europe’s states needed more market discipline while the financial markets needed more EU discipline?

    The article goes on to identify the ECB as Germany’s prime ally in the fight against those who would thoughtlessly sacrifice the currency and the financial sector to save the wider Eurozone economy.

    What a mess.

  15. @ John McHale

    It now seems rather beside the point to focus on the fact that the original source of the crisis was not primarily fiscal.

    Of course, because being right about the problem means that the neoliberal establishment just hate you all the more, it seems (similar tactic deployed against Iraq War sceptics, incidentally).

    Also, the fact that these “large contingent liabilities” are I presume the unwise loans from private German banks during the property boom, it seems rather odd for you to present Frau Merkel’s role in bailing out the same banks to be an act of altruism.

  16. @Brian
    Nah , no bank credit no houses.
    We have suffered a Californication of our coast.

    Check out Courtown near Gorey on OSI & Google Earth.
    Its like a Irish Knots Landing without the swimming pools out back.

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

    Meanwhile the West is more South Fork like with Picket fences all over the gaff.

    http://www.youtube.com/watch?v=MlHC4a2LbhI

    Shame we don’t have that reserve currency thingy…….. it could come in handy for all that precious liquid fuel we need to burn to just keep this soap opera on the road.

  17. @ Shay Begorrah

    The Fiscal Compact is an attempt by the political right to win this battle of opposing ideological positions and class interests and ensure that it can never be fought again.

    It was the most amazing act of chutzpah by the neoliberals to try and make social democracy take the fall for the largest market failure of the last eighty years but they may well get away with it.

    If we vote “Yes” we will be voting to for a lie.

    You’ve nailed it.

  18. There are no simple explanations for big global changes and crashes but there is a tendency to grasp the explanation that fits a pre-existing view.

    Political economy responds slowly to rapid changes such as the addition of 3bn consumers to the global market; the consequent surprise drop in inflation; the financialisation of markets and the growth of sovereign and household debt, the capture of the majority of the gains by capital, technological change and the growth of global supply chains.

    As regards Europe, and the search for engines of growth, it also appears that people are inclined to put forward region-wide solutions and the evidence from this blog is of little interest or credible proposals when specific Irish economy non-bank related topic threads are opened.

    However, it does help to look at how for example the credit and property booms masked underperformance in for example, Ireland, Spain and Italy. UK growth was underpinned by an expansion of the public sector and France last balanced its annual finances in 1974; the social security tax on pay is 40% (30% paid by the employer and 10% by the employee).

    In 1993, the Spanish unemployment rate was 22.2%; 21% in 1997; and in March 2012 24.4%.

    In many countries, the social model has broken down with members of trade unions retaining priviliges while temporary employment has expanded – – in ageing societies giving lopsided economic power to older people while the purchasing power of the young in the workforce is stifled.

    Reform isn’t easy and two Italian economists advising the government on labour-market reforms have been assassinated in recent years.

    I wrote in 2006:

    http://www.finfacts.ie/irishfinancenews/article_10006912.shtml

    Julius Caesar reputedly said that the general who rests on his laurels, is usually wearing them in the wrong place and as the outlook for the Celtic Tiger beyond 2008, looks uncertain, there is a sense that the significant opportunities to reform and modernise the economy to better withstand future challenges, have been wasted. Tacking through the wind has been the default option and while there have been some improvements, a Texan might sum up the overall picture, as putting a brass knocker on a barn door.  

    Gideon Rachman, FT columnist, writes today that the drive to balance budgets within Europe must be combined with reforms that will encourage private-sector job creation. The scope for such reforms is enormous. Taxes on labour in France are very high.

    Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before? Unfortunately, a vacuous slogan is underpinned by ineffectual proposals. Mr Hollande’s programme stresses small, badly-targeted boosts to public spending, while virtually ignoring the structural reforms that are the only route to sustainable growth.

    In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming.

    Mr Hollande, who is not an idiot, knows all this. That is why, behind all the feel-good rhetoric about ending austerity, the small print is less exciting. In fact, all the Socialist candidate is promising to do is to take a year longer than President Nicolas Sarkozy to balance France’s budget. In Europe, even the left cannot pretend that deficit-spending can continue for ever. So they are reduced to arguing that governments are cutting, “too far and too fast”, in the words of Ed Balls, Britain’s shadow chancellor. This is small-scale quibbling – masquerading as a major doctrinal dispute.

  19. @ John McHale A bit I find interesting in looking at the stability treaty’s impact on the crisis, is that no one is asking specifically what Ireland and Spain would look like had Germany and Italy etc adhered to the SGP? What would ECB base rates have looked like in that scenario? Would it have made a difference?

  20. @Michael Hennigan,

    Your persistence is admirable, but this referendum looks like it will be a damned close-run thing. The ‘raid, tax and spend’ brigade seem to have captured what they see as the moral high ground. Even usually sensible economists such as Karl Whelan and Colm McCarthy have found themselves off-side. It looks like John McHale is the only one here leading the charge for a bit of sense and reason.

    The problem is that economics as a discipline has failed to diagnose the true nature of the circumstances that led to the general blow-out; and, as a result, is totally deficient in advancing remedies. In the same way that ‘freshwater’ economists – and not a few ‘saltwater’ economists – in the US proved to be useful idiots for the Neocons, it looks like Karl Whelan and Colm McCarthy have done some service as useful idiots for the ‘raid, tax and spend’ brigade.

    But the economists, understandably, are loth to admit the deficiencies of their discipline. It would be wonderful if they were to stand back and examine these issues from the perspective of institutional economics – and to follow the money and the power.

    It was extremely unfortunate that the ECB found it had no option but to bump bank bondholders up the queue ahead of sovereign bondholders so as to avoid a meltdown, but the governments of the Euro had consciously deprived it all the powers and tools to operate as a proper central bank. It is grindingly slowly acquiring some of these.

    The Fiscal Pact is simply an attempt to make sovereign bonds as risk free as possible so as to get sovereign bondholders back up to their proper place in the queue. And this requires reducing the amount of sovereign bonds issued. So contrary to what many economists might think or say, this exercise is a key element in resolving the Euro crisis.

    The Troika package had three elements: Colm McCarthy himself once put it succinctly – fix the fiscal deficit, fix the banks and reduce the cost base of the economy. Progress is being made on the first two, but on the third, which was required to counter-act the detrimental impact of the first two, the various narrow sectional economic interests have been able to force the Government to whittle it down to almost nothingness.

    And it seems the Troika have gone along with this – presumably convinced that giving in to the various vetsed interests is a necessary price to pay to avoid the industrial and economic unrest that might prejudice the achivement of the fiscal adjustment.

    Let’s hope it stays fine for them. But I can’t see it lasting. Disbelief may be suspended for only so long; and then reality comes crashing in.

  21. @Shay

    I think we should be realistic and accept that the Euro has been Germany’s beast from the very beginning, if the peripherals plan to stay in it it will be under German conditions.

    Agree 100%. Germany is booming due to the cheap euro and they are not going to give that up. We need to get out of the euro, it’s the only solution to reining in our bloated public sector and restoring competitiveness to our economy.

    I agree with the basic idea of the fiscal treaty (controlling spending) but I see the referendum as a poll on the euro – so I will vote no.

  22. @Joseph Ryan

    “One wonders is there any hope that Germany will pull back from the destruction she is forcing on Europe.”

    The headline in the FT today probably answers that question. Schauble (and other European conservatives) is not for turning.

    @Eureka above is spot on: this started as a banking crisis and will end as a banking crisis. It will certainly end in tears otherwise. Some of these banks have to be allowed to fail and I think they are going to start failing in Spain. JCT is the real architect of all this bank bailing out/no bondholder unpaid.

  23. @John McH

    I agreed with the content of your post up until the last sentence. The emphasis on the fiscal causes of the crisis has led to the prescription of fiscal solutions, embodied in the fiscal treaty. Not only do such proposals waste political willpower, but they actively increase the damage to the economy as a result.

    The problems in Ireland are the result of a plain old, commoner-garden property/banking crisis that has occured many times in recent history. The solutions to such a crisis are typcially two fold:

    – currency depreciation coupled with inflation to reduce the overall debt burden
    – a full-on resolution of the banking system, including severe haircuts on bank-bondholders.

    Obviously, the Euro prevents much movement on the latter, but one would have expected some help from the EU/ECB on inflation, if only out of a self-interested quest for stability. Instead we have seen heels been dug-in and had to listen to moralising about how sovereign state finances should be managed like those of a schwabian household.

    On the latter, the ECB has actively prevented what little burning of senior bondholders could have been achieved outside of the guarantee. That is unforgivable and incredibly stupid on their part.

    The fiscal deficit is not the major problem in Ireland, but rather a symptom of it. Yes, the deficit will have to be dealt with sooner or later but the major problem affecting recovery and creditworthiness is the overall debt burden.

    That will have to be dealt with by restructuring either by leaving the Eurozone or by forcing the issue politically within. However, at the moment, the Government and the economic establishment in Ireland (including JMcH, PL, PH and others) have their heads buried deep in the sand about this.

  24. @ Eureka/Shay

    This isn’t a banking crisis. It’s, as we originally termed it, a credit crisis. We’ve inflated a credit bubble over the last 25 years that ended up infecting almost every element of our economy – sovereign, household, and financial system (interestingly, proper corporates, for the most part, have managed to avoid it). Banks obviously played a huge part in this, but so did governments, through their generally pro-cyclical fiscal, economic and social policies, and so did consumers/households through willfully taking on more and more leverage and debt.

  25. @Bond

    “This isn’t a banking crisis.”

    Whaahaahaahaahaahaa

    Are you having a laugh? Let me guess, you work in a bank?

    So I suppose that the crisis in the US was purely to do with subprime property and that wasn’t a banking crisis either. If only those innocent banks weren’t forced to lend to all those feckless poor people.

    And the crisis in Finland in the 1990s and Japan in the 80s and 90s – credit or property or banking crises?

    No wonder our banks are in such trouble.

  26. Noonan:

    “If there’s a ‘No’ vote, the Budget I’ll be planning for later in the year will be dramatically more difficult than if there’s a ‘Yes’ vote.”

    In the mainstream media. Unchallenged. No other view sought.

  27. @Eureka

    You seem to be trying to convince yourself of something that you know doesn’t make sense. This started as a banking crisis and will end as a banking crisis. All this focus on fiscal rectitude while refusing to acknowledge that role of banking in the solution doesn’t make sense

    Completely agree.

    @John McHale

    But pointing out that the original cause was not primarily fiscal does not seem particularly enlightening or helpful in charting a way out.

    Rephrasing to avoid the double negative is “The original cause was a property and credit bubble, but it is helpful and enlightening to ignore this in charting a way out”. This makes no sense.

    If the diagnosis of the problem isn’t accurate, the solution won’t work. Diagnosing that the problem is essentially a domestic fiscal one does not lead to what I consider a pre-requisite for any solution that will actually work – decoupling the banks from the sovereigns. This has to be done in an EU context, as pointed out by Chopra in his Kenmare speech, and others. It needs to be done in stages, and there are a lot of moving parts, but instead of discussing how this can be achieved there is instead, from “Official Ireland” what appears to be an ongoing attempt to ignore or downplay the entire issue and its relevance to the solutions needed.

    One, pretty pointless, manifestation of this was the recent ever-more frantic claims regarding the ratio of bank debt to total debt, which Noonan got down to 20% in the end. The IMF didn’t agree – they put the numbers at 41.2% gross and 38.5% net, not that the precise ratio matters so much.

    The recent SPU showed that Ireland has contingent liabilities of over 110% GDP, all linked to support for the financial sector. This will be looked at very closely by potential investors in Irish bonds.

    These investors don’t look at the problem as a domestic fiscal one, so why should that be the view that is driving all the (inadequate) solutions?

    These investors don’t look at government finances as being the same as a prudent housewife managing the family finances, so why is this dominant narrative left largely unchallenged by the economic establishment?

  28. Slightly off topic. I note the Fiscal Advisory Council is not making any recommendation on the referendum vote in the name of the Council, though members of the Council have expressed their own views on the Treaty.

    But will the Council have a view on Minister Noonan’s reported statement this morning that Budget 2012 will be “dramatically more difficult” if there is a “no” vote. Cynics might dismiss the Minister’s words as scaremongering, but isn’t the point of a Council to arbitrate between economic/political/politicised statements on the Budget?

    http://www.irishexaminer.com/breakingnews/ireland/noonan-vote-against-treaty-would-mean-dramatically-more-difficult-budget-549709.html

  29. @Paul

    Thanks for the kind words. But I think you are being far too harsh on Karl Whelan and Colm McCarthy. I see no ambiguity at all in their call for a Yes vote. Indeed, they provide a useful perspective in calling attention to potential design flaws in the fiscal rules, while still noting the strong all-things-considered case for a Yes vote. While I probably do see more overall merit in fiscal rules than Karl or Colm, I also question some of the specifics. For example, the MTOs look too tight for the long term, especially the maximum one-percent deficit for countries with debt ratios below one percent. Also, given the sychronised nature of fiscal adjustment across Europe, the deficit targets under the various EDPs look overly demanding for some countries.

    I realise, of course, that your main point relates to the neglect of the cost-related elements. We all need to try harder so that we have something useful to say.

  30. @ Michael Hennigan:

    In many countries, the social model has broken down with members of trade unions retaining priviliges while temporary employment has expanded – – in ageing societies giving lopsided economic power to older people while the purchasing power of the young in the workforce is stifled.

    Reform isn’t easy and two Italian economists advising the government on labour-market reforms have been assassinated in recent years.

    So your solution to the imbalance is to “reform” away the existing rights of the older workers. Lovely.

    And the claim that the poor old free market economists are being blown away in Italy, martyrs for for the cause, is at least deserving of a link or two to susbstantiate.

    @ Paul Hunt

    I was wondering when you’d ride in to the rescue of ‘austerity’. You should get a job in the IT.

  31. @Bond. Eoin Bond

    You appear to be saying that the bank credit risk departments and households/consumers are equally to blame. They are not. The banks utterly failed in one of their core functions. How many people were fired as a result?

  32. I think John McHale is misdiagnosing both the euro zone crisis and the Irish property bubble crisis eg “think most of us can agree that the Irish crisis was predominantly the result of an interacting property and credit bubble”. This is a fairly common mistake. Unfortunately, with misdiagnosis comes the cure
    based error of a wrong prescription from both euro zone and Ireland leading to the imminent financial death of both the euro zone and the Irish economy. The prescription of austerity is killing the patient?

    For an answer to the conundrum we’ve no further to look to our esteemed President, Michael D Higgins, affectionately known as Michael D. In speeches in New York and Boston last night, he used the phrase, referring to the Irish economic crisis, “self located in a global recession based on speculation’. In fact, John McHale’s use of the word ‘credit bubble’ may also be brought into the equation providing an answer.

    So what has really caused the European and Irish economic crisis? One word, speculation.

    Since the dollars floatation in the 1970’s with the easing of regulatory controls in the global financial system combined with the rise of shadow banking, there has been a phenomenal growth in the financial services industry spurred by the creation of a host of financial credit instruments aiding speculation in a vast array of financial instruments promising amazing returns on OTC’s, derivatives, CDS, the list goes on with variants of these custom made to the imagination of Enron’s Berni Madoff; unlimited to Goldmann Sach’s CEO Lloyd Craig Blankfein and former CEO Henry Paulson; helped by the growing power of a small number of Wall street banks and the disappearance or takeover of the competition.

    Lured by opportunities provided by a vast array of new financial instruments offering returns far in excess of what could be gained by business in the real
    economy of food, pharmaceuticals, motor industry, manufacturing, business enterprise, investment banks and institutions have redirected their investments into this new matrix virtual economy. The consequence of this in economic terms has been to make the relationship between speculation based on new financial instruments and the real economy increasingly less fungible( A good or asset’s interchangeability with other individual goods/assets of the same type ).

    This has led to a number of bubbles. We had the internet bubble and crash. We had the 1929, October 24, Black Thursday threatened mirror in mid September 2008 on foot of an ignored $8trn housing bubble. We’ve had housing bubbles in Spain and Ireland.

    The financialisation of loose credit instruments feeding upon the inward flow of investment in US Treasury bonds feeding into loose regulation of the financial services industry, the financial services industry tapped into a revenue source for large private banking conglomerates in the US that enabled it to trip wire the economic system itself.

    Speculation injected and fueled with the means to produce vast quantities of new financial paper instruments in a low regulatory environment has given rise to similar conditions that existed pre 1929. At that time, vast profits were offered to the American middle class to cash in on loose credit and investment returns based on ponzi economics, profits to first in used to gather in the lates who would pay for the collapse. From wiki,

    “The crash followed a speculative boom that had taken hold in the late 1920s, which had led hundreds of thousands of Americans to invest heavily in the stock market. A significant number of them were borrowing money to buy more stocks. By August 1929, brokers were routinely lending small investors more than two-thirds of the face value of the stocks they were buying. Over $8.5 billion was out on loan,[17] more than the entire amount of currency circulating in the U.S. at the time.”

    President Higgins is exactly right. We are being sucked upward into a tornado of global speculation. Debt levels are rising to astronomical levels to feed the global economic system infected by a a new virtual speculative environment fed by debt and its proxy, the financial services industry. Connectivity between the real and the virtual is becoming more and more fragile. The passing around of toxic derivatives, OTC’s based on subprime in 2008 among the banks before the collapse of Lehman’s in 2008, was a mere symptom of an ailing global financial system based on speculation.

    There are a number of remedies to bring the global economy back to reality based on a fairer system of market economics.

    1. Bring back the gold standard. Its abandonment has led to the destruction of manufacturing in the US and the destruction of the US middle class who’ve been ransacked under financialisation in a manner similar to the way european taxpayers are being hoovered of their resources to pay the profits of the 1% of speculators gaining from the above.

    2. Break up the large investment banks across the world into smaller banks mandated to support business and communities on policies similar to the independent and public state banks in the US, eg The Bank of North Dakota

    3. Sterilise financial instruments of economic destruction. Reduce the amount of speculation that can occur around these instruments.

    4. Impose strict auditing and rules for accountability, registration and transparency on financial instruments and all financial bodies (especially toxic institutions eg NAMA)

    5. Oppose the troika Goldman Sachs policies of unlimited fuel for financial
    institutions paid for by taxpayers.

    6.Oppose the troika European directives on SIFI (Systemically Important Financial Institutions). Banks made toxic by speculation need to be closed.

    7. “Keep You Hands Off Our Constitution” Do not let the financial institutions and their unelected ESM minions control your children’s future and your country’s budget.

    Create a financial system built to serve the needs of the people whose lifeblood has not been vampired into to provide unlimited profit for financial speculators, unelected bank officials and political cronies.

    So, lets not blame entirely Irish banks, property developers, property speculators, lack of Regulation at DoF or Irish Central Bank, or ECB level for the credit bubble. It is rather more wisely put by President Higgins, as “self located in a global recession based on speculation’ . That speculation continues to be unaddressed at global and european level. Current responses based on austerity and more QE and LTRO fuel for the banks, is more fuel to burn down the global economic system.

  33. @Japdip

    You continue to press us to produce fast-response commentary. (I do appreciate your ongoing interest.) Our view is that it would be counterproductive for the Council to try to engage in this kind of commentary, and risks the Council becoming politicised. In any case, getting five opinionated people to come to a consensus is not a fast process. It is also important to note that two of the five members are based outside of Ireland and another member divides his time between Ireland and the US. We think that it is more effective — and consistent with our mandate — to limit our assessments (as a Council) to our regular reports (including post-report media) and appearences before the Joint Oireachtas Finance, Public Expenditure and Reform Committee. (The transcript of our appearence last week should be available shortly.)

    Having said that, we also think it is important to retain a seperate identities so that we can also contribute to ongoing debates in the capacity of our day jobs. While it would be counterproductive for these positions to be seriously at odds with Council positions, I think there is scope for continued individual identities (even on fiscal matters) while serving on the Council. Indeed, I think having such identities and being willing to participate in public debates can add to our independence. But we are still feeling our way on this to some extent.

  34. @ john Mchale

    If you want to be taken seriously by mainstream people, not ivory tower economics would you please stop refering to Larry Summers. Summers is the problem given his history with the free markets.

    Nanny state for the rich = Free markets. I can,t believe my house hold pays part of your salary. Jasus.

  35. Look lads , this can be easily solved by issuing treasury paper by Independent goverments (independent from banks) that cannot be incorporated withen credit banks books so that their purchases of interest bearing debt cannot bail their malinvestments out.

    However it will not happen for obvious reasons – the Network has infected all aspects of Irish Culture… it was always on top since the Cabinet wars at least but I feel it has become even more powerful since the 70s – forming a obvious clique that farms international credit / Petro flows for no net benefit to anybody but themselves.

    This is fall of Rome stuff I fear.
    Perhaps after a Dark Age of many hundreds of Years a King will reinvent Tally sticks or some such device to cut the bankers off.
    Before that there will come a point when the citizenry will welcome the Barbarians as their saviors & leave the towns for the countryside – its just a question of when I fear , but it could be quite some time yet.

    We can at least sit and ponder this mess while it begins to collapse through it own internal contradictions.
    At least until stormpolice come kocking on your door.

  36. @Bryan G

    You misinterpret me. I am not saying that our current crisis is primarily a fiscal one. We have three interacting crises: banking, growth and fiscal. As noted in the post, what makes things so difficult is that the needed policy response in one area can aggrevate another. Ajai Chopra’s recent speech at the IMF/World Bank Meetings outlined this very well, and he noted the narrow path to successful exit. While I do think it is criticially important to understand how we got into this mess — mainly to avoid ever doing it again — it is also important to look at what is in front of us now. With countries now unable to borrow, facing severe debt stabilisation challenges and underdeveloped euro zone mutual support mechanisms, it does not strike me as particularly useful to be preoccupied by the idea that the cause of the crisis was not primarily fiscal profligacy — even if that is true.

  37. John I agree in general with your post but would reverse the causality in your sentence “Rising property prices fuelled credit inflows, which in turn fuelled the property bubble.” The fundamental causal factor was the credit inflow — what Reinhart and Rogoff call a Capital Bonanza and which often lies behind financial crises. The massive property price increase was an effect of this credit inflow rather than a fundamental cause. The credit inflow caused the property price increase.

  38. @John McHale,

    I know you feel obliged – and it’s to your credit – to keep a bit of order on those of us here who enjoy a bit of ‘rough-and-tumble’ – so as not to frighten people off, but I think you’re being almost too even-handed.

    I also think you’re well aware that I’ve been banging on about structural reform and the need to deploy state equity, currently locked up inefficiently and unproductively, in a productive and efficient manner since I came across this blog more than 3 years ago.

    On a previous thread I linked to the magnificent blast sounded by Colm McCarthy last January:
    http://www.independent.ie/opinion/analysis/colm-mccarthy-austerity-yes-but-where-is-reform-3002934.html

    I thought then that the corner had been turned, but no.

    There are so many things that could have been initiated 3 years ago – and certainly no later than the arrival of the Troika in Nov. 2010 – which would be bearing fruit now. It’s still not too late, but this government seems to have dissipated and frittered away any political capital it might have had to pursue some sensible reforms.

    The key is in the state equity locked up in the semi-states – and this is also linked to the fiscal compact. All Euro Area member-states will have to curtail the amount of sovereign debt in issue to reduce its risk, to attract ‘rate’ investors, to reduce the market power of the shorters, speculators and vultures and to re-instate sovereign bond investors ahead of senior bank bondholders in the queue.

    In Ireland’s case this means unlocking state equity to reduce the GGD and to create a slightly more risky infrastructure and utility asset class – off the state’s books – to provide investment opportunities for long-term, ‘rate’ investors.

    That means selling off infrastructure and network assets under reformed regulatory arrangements. In contrast to the US, the half-arsed liberalisation of the infrastructure and utility sectors means that regulators are forced to be the counter-parties in ill-defined, incomplete constracts for all sorts of infrastructure and network capacity. But this can ne managed – and there is scope for structural remedies (as opposed to the ineffective behavioural remedies currently in vogue).

    A comprehensive programme of semi-state retsructuring, re-financing and privatistion could generate up to €15 billion. A third of this could be ring-fenced for productive investment – the remainder reducing the GGD). It should have been kicked off years ago, but a large number of unemployed construction workers could have been re-skilled to retro-fit energy insulation of the housing stock – with significant short and long term benefits – using some of these proceeds.

    The state could re-acquire Eircom and leverage investment in the roll-out of high-speed broadband. There are countless other areas where some of these funds could have been deployed effectively withou prejudicing the fiscal adjustment programme – and would certainly counter-act its deflationary impact.

    Two years ago, while in opposition, FG introduced a private member’s bill to cut state-directed fees, charges and payments. It lost the bottle in government, but it would have, in some respects, matahed the internal devaluation being pursued and expereinced by the non-sheltered sectors.

    There are countless other reforms – including properly empowering the CA – that could have been initiated, but this government has neither the guts not the gumption.

    As the domestic economy sinks in to the mire, historians will record this era as the ‘triumph of the sectional economic interests over government’.

  39. @Gregory

    Perhaps it is awkwardly stated, but I did mean to stress the two-way causality. I don’t disagree that the main driving force came on the credit inflow side. But I wouldn’t overly discount the pull role of rising prices. Indeed, the initial rise in prices almost surely had a significant fundamentals-driven element from the Celtic Tiger phase and various agglomerative forces. These price increases sucked in credit, and a horrible (misdiagnosed) bubble was formed. I certainly agree that credit availability was a necessary condition for what occurred.

  40. On the topic of Italy

    http://newleftreview.org/?page=article&view=2939

    “True, the ‘ever-closer union’ this entails will be anything but an idyll; it will have come to pass in the style of a shotgun wedding, necessitated by an unplanned pregnancy and enforced by parental authority—not usually a recipe for happiness. The ‘transfer union’ currently emerging may best be compared to unified Italy, whose rich northern regions have subsidized the backward south throughout the post-war period, without much effect….
    If Lombardy has not succeeded in generating the capitalist modernization of the Mezzogiorno over the course of half a century, what hope is there that northern Europe’s transfer payments to the Mediterranean will ever be anything more than a levy on northern tax-payers for the higher productivity of their countries’ corporations?…..
    An often overlooked yet ominous parallel exists since the introduction of the euro, which in Europe, as in Italy, has blocked the possibility of devaluation for the economically weak regions of the South. The result could be the same: permanent backwardness, insurmountable dependency on transfer payments, and growing disenchantment amongst both recipients and providers of economic assistance.”

    (What exactly have people been doing the past 4 years that we are one month out from another European treaty, that noone believes is going to accomplish anything positive, and the only argument is ‘we have no alternative’. We’re living through a repeat of Sept 2008)

  41. @ Bazza

    first off, please check out the line in my previous post where i state “the banks played a huge part in this”. Assuming you actually read that part, then you seem to imply that this crisis is solely down to the banks, no? if you think this is just a banking crisis, then you don’t seem to understand or accept how our financial markets and economies currently work. France has run deficits for around 25 years in a row, or pretty close to that. Did the banks make them do that? Ireland ran a chunky structural deficit when we thought we were running a really big surplus. Banking sector mess that part up? Are Greece’s problems as a result of the banking system?? Did Norwegian municipalities buy subprime bonds because they were forced into it by banks or is there an element of investors being too greedy and too apathetic to real underlying risks?

  42. @John
    You cannot grow out of the suburbs creating new outer outer suburbs.

    We have a so called growth crisis because of the physical world that Bank credit created….. the input costs are now just too great and are indeed absurd.
    Since at least 1987 and perhaps the 70s we simply had a increase in depletion , it was not capital growth.
    We need to produce base money of some sort so that the money can flow to the most effiecent activities.

    Look around you – the three items that dominate the landscape are buildings ,roads & cars …. most of these items are creatures of bank credit or fiscal money serving a secondary role used to service these bank credit “investments”

    http://www.youtube.com/watch?v=mdI_MmN-Lp4

  43. @John (McHale)

    I appreciate your position and I wasn’t expecting a Council response to the Minister’s statement 60 minutes ago! I wonder though if your near-counterpart in the UK would react if an important source – be it political, economic or other – made an assertion about the UK budget, would they have the capacity to issue a statement. And does the existence and capacity of the OBR actually act to forestall wilder claims – not to say Minister Noonan’s “dramatically more difficult” claim was wild, necessarily. It is appreciated the Council is still finding its legs, after all we’ve only just had the scheme of the FRB published!

  44. @John mch

    “A common narrative has developed that the euro zone crisis is being misdiagnosed as a crisis requiring a fiscal cure.

    ?????

    But pointing out that the original cause was not primarily fiscal does not seem particularly enlightening or helpful in charting a way out.”

    Perhaps failing to point this out actually winds up ordinary people so much that it actually is helpful in assuring them their advisors are not delusional.

    How can it be viewed as “not particularly enlightening”?

    Is it the case that in discouraging a more rounded discourse other than fiscal rectitude, those who think it need to be carried out risk alienating sections of the public.

    Can people not be trusted with arguments about the sustainability of Germany in the Euro, the Euro etc etc, or is it assumed that that will just confuse them into acting irrationally?

  45. @ Jagdip

    Re “I note the Fiscal Advisory Council is not making any recommendation on the referendum vote in the name of the Council….”

    @ John McHale

    “risks the Council becoming politicised….”

    I find this rather amazing. Surely as part of a public information campaign FAC should be informing people with a set of budgetary economic parameters including budget deficit reductions implications of commitments in the Compact and other relevant economic data ?

    No need for the urging of Y or N ? There is no need to state favour for either, just state the facts as known.

    Its fairly clear to me that withholding of such data amounts to politicisation
    based on the view the less people know, the better.

    I rather suspect that the 5 members of the FAC do not quite know what the data is likely to be based on with moving growth targets of .5%, 2.89% and so on with growth projections at the high end supporting the Y hope austerity will work while growth at the low end, 0.5% according to IMF estimates making our debt unsustainable.

    But one would have thought a rigorous assessment of the economic terms of the Compact based upon a moving set of assumptions from .5% – 3% growth including the levels of private debt/mortgage default and the implications of a further bailout under ESM, without debt write down and under current bailout, would have been seen to be helpful?

    Apparently, the Referendum campaign will distinguish itself for the lack of information provided to people. If you don’t understand it, don’t sign it!

  46. @Gregory Oc

    I would be inclined towards the credit availability, and importantly the step down in price of credit around Euro entry ( a classic example of the wrong interest rate policy being applied) setting off the second and distorted part of the boom in property prices. But by the time you get to say 2005 or so you could really argue the causality reversed, and that the price rises mesmerised all sorts of people, causing more credit to be channelled into the country.

  47. @Bond

    “you seem to imply that this crisis is solely down to the banks, no?”

    No! I was refering to the crisis in Ireland (not France or anywhere else) and I think the problems here was caused by the banks, the regulator and the government of the day.

    However, in Ireland we are now in the middle of a full-blown banking crisis. It is simply ridiculous to say, as you did in your previous post, “This isn’t a banking crisis.” If massive recapitalisations, state ownership of more than half the system and a dearth of credit do not consistute a banking crisis, then what does?

  48. @ Bazza

    the Irish collapse is an offshoot of a greater problem – we’re all hooked on credit and debt. This involved more than just banks, and you can’t look at this purely on our little island, given the interaction we have had with the Eurozone and international finance. The Irish credit bubble did not occur in a vacuum, and is the result of the “ownership society” first envisaged by Regan and Thatcher in the 80s. Banks bought into this, but so did pension funds and asset managers, and so did most of our citizenry.

    Our problems were much more focused bank-led/focused than some countries, obviously, but most of our outstanding debt will still be as the result of fiscal deficits rather than banking rescue costs – this is a simple fact. We built up a structurally unsound fiscal framework which relied on boom-cycle property-related taxes (heavily funded by banking credit) to pay unsustainably high social transfers and public services. Our entire economy and society bought into the myth of the credit-fuelled bubble. If it didn’t we could easily have parked even more aside than the 20bn or so we stuck in the NPRF.

    I’m not attempting to absolve banks of any of the blame here, but there’s enough of it to go around to cover a lot of people. Ireland has been faced with a public deficit crisis at the same time as a banking crisis, and we are now potentially faced with a household debt crisis, which has as much to do with banks as it does to overall personal/government attitudes to debt, pushed initially by governments and lapped up by an eager public who, by virtue of human nature, would prefer to have something now rather than wait til next week to receive it.

  49. @CB No hands are going on our Constitution. We’re simply being asked if the Government may ratify the treaty.

    http://www.oireachtas.ie/documents/op/Apr12/Business/op200412.pdf

    There’s nothing there to force them to ratify it, or indeed even if we give them permission and they ratify it, there is nothing there to prevent them terminating their membership of it at some point in the future.

    The Stability treaty is not going into the Bunreacht in any way, shape or form.

  50. @JMcH,

    “We have three interacting crises: banking, growth and fiscal.”

    I beg to disagree. We also have an employment crisis which is no more identical with the growth crisis than the fiscal crisis is.

    Some growth (from more pharma exports) has almost no impact on either government revenues or employment. Some (e.g. from more food exports) has lots of impact on both revenues and employment, both directly and through indirect and induced effects in the rest of the economy.

    While I’m on the subject, I’ll float a thought that has been increasingly on my mind. I have a strong suspicion that the poor performance of the Dept. of Finance and ESRI on macroeconomic projections is partly a consequence of getting this wrong – that buried deep within HERMES is a significant degree of overoptimism about the relationship between net output, and both employment and indirect and induced economic impacts, for the modern sectors and perhaps even for some of the traditional sectors.

    There is plenty of evidence that these relationships have changed a lot in recent years, certainly since the latest Input-Output tables were produced in 2005.

    Unfortunately, there doesn’t seem to be much published on HERMES, so I can’t verify it, but I have been noticing hints in the outputs published that what I am suggesting is in fact the case. However, perhaps this might stir your curiosity enough to have a peek for the benefit of the Fiscal Council.

  51. Krugman and Summers substantive point is that the current policy mix is very obviously failing. Perhaps failed. That’s what is important, not a Jesuitical discussion on how “helpful” is their focus on the starting point of the fiscal stance.

  52. @ Simpleton

    Also, from Krugmans article:

    “In a way, it doesn’t really matter how Spain got to this point”

    So it’s largely a strawman that Krugman is engaging in an ‘unhelpful’ discussion on what the original causes were.
    He’s offering a specific set of policies to deal with the crisis we’re in, and his opponents have no menaingful alternatives

  53. “this started as a banking crisis and will end as a banking crisis.”

    I’m bemused at the opprobrium heaped on Mr. Bond. As Gregory Connor points out above too, this was a credit crisis fueled by untramelled capital flows. Capital flows that were encouraged by the elected government. Capitl flows that were cheerled by the media.

    At all points in the bubble, the response to the excesses of the capital flows were to loosen standards of regulation, provide tax breaks to debtors, reduce direct taxation to provide more income to match affordability criteria, increase pay.

    It should surprise no-one that our bankers are as incompetent as our politicians, but over-heating the economy was a deliberate political act. Have memories of McCreevy and Ahern’s two fingers to Europe faded so quickly? Of the developer’s tent?

    If it was just a banking crisis, how come we’d have a deficit of 10bn+ even if all bank debt was repudiated?

  54. As a mild diversion there is an interesting thread at snarky academics hangout Crooked Timber on what I like to think of as the “Free Market Reform Tourette Syndrome” that afflicts some of those in the pro Fiscal Compact lobby here and in the wider EU but which is particularly prevalent at The Economist magazine. It is an enjoyable read and a reminder that market liberalism is as much a psychopathology as an ideology.

    http://crookedtimber.org/2012/04/30/tough-clear-headed-reform/

    Here on this thread I think you can see the evolution of the justification for the Fiscal Compact from Jesuitical to Jim-Jones quite clearly.

    Remember not to restrict your opposition to the Fiscal Compact to this blog folks, it really is all to play for and the Fiscal Compact is one unpleasant Orwellian piece of Eurotrash. God knows what we will face in five years if the people who gave us the financial crisis win again.

  55. @hoganmahew: “It should surprise no-one that our bankers are as incompetent as our politicians….”

    Well it came as a surprise to me and I’m not the only one who held AIB and BoI shares in the belief that they were managed by people who weren’t utterly reckless. In my working days I met one or two senior managers and they certainly didn’t strike me as being in the same league as Bertie or Pee Flynn.

    I really don’t think this world-weary, “sure we always knew they were gobshites” approach is a good one, in terms of understanding the past or planning for the future.

  56. @ hoganmahew

    “a credit crisis fueled by untramelled capital flows. Capital flows that were encouraged by the elected government. Capitl flows that were cheerled by the media.”

    What ‘elected governments’ encourage and the media ‘cheerlead’ in relation to international capital flows, has nothing, absolutely nothing, to do with the ‘ordinary voter’
    Do you think those same banks have no influence in the formation of policies that are central to their sector?

  57. @rf
    “What ‘elected governments’ encourage and the media ‘cheerlead’ in relation to international capital flows, has nothing, absolutely nothing, to do with the ‘ordinary voter’”
    Then why were there then and still are now moaners on Liveline complaining that the banks won’t lend them as much as they want to borrow? Who is this mythical ordinary voter? Is it someone who remortgaged their house in Ireland to buy an apartment in Budapest? Is it someone who voted in Fianna Fail time and again?

    “Do you think those same banks have no influence in the formation of policies that are central to their sector?”
    I know that at least one bank was aghast at the introduction of 100% mortgages and tried to get the regulator to stop them. I’ve no gra for the banks, though. I realised they were bust in 2008. When did you?

  58. Just to follow up, using terms like ‘elected governments’ is a dog whistle to imply that the voters themselves are responsible.
    This is quite obviously wrong. Regulation and tax policy (etc) does not come from the public, it comes from the private interests most directly affected.
    Yes its a problem of government aswell, but a government captured by specific interests (one of which, domestically and globally, is finance)
    Theres a lot of blame to go around, and its impossible to disentangle stupidity from ideology from outright corruption.
    The blame though lies at the top, in politics, academia and the private sector. No where else

  59. @Kevin Donoghue
    “In my working days I met one or two senior managers and they certainly didn’t strike me as being in the same league as Bertie or Pee Flynn.”
    I’m sure their manners were exquisite as were their knowledge of the intricacies of front-row collapses and the breakdown. Judge them on their own terms, though. The senior bankers drove their companies to insolvency. B & P were out and out populists. Crooked too. I’d say that B&P were in a league above the bankers…

    “I really don’t think this world-weary, “sure we always knew they were gobs[]” approach is a good one, in terms of understanding the past or planning for the future.”
    That’s not what I’m saying. What I’m saying is that the economy was deliberately over-heated in around 2001/2 as a result of political influence. The bankers played the part of idiot treasurers – as long as there is money available for us to borrow, we’ll loan it out. Short-term “when I have it, I spend it”. Much like the average Irish consumer “when I want it, I buy it”…

  60. @ RF

    “Burden of proof is on those that want to prove otherwise I would think?”

    Greece, Portugal and France’s problems were not caused by banks. Either were Italy’s really, and most of Ireland’s debt is from fiscal deficits rather than banking rescues.

    “What ‘elected governments’ encourage and the media ‘cheerlead’ in relation to international capital flows, has nothing, absolutely nothing, to do with the ‘ordinary voter’”

    Governments are directly elected by the people, reasonably regularly. We constantly chose the option which offered the least pain. And as Ryan Tuburdy used to say, the property section of the Irish Times was like “p0rn for the middle classes”. Media only succeeded in cheerleading because people kept buying their product. At any stage we can decide to vote in a hard left, socialist government that will change our default policies and discourage credit, leverage and the importance of the financial markets. When that happens it will show we are serious in wanting to change our ways, but until then it is bizarre to honestly believe that banks were the only thing that caused both this crisis as well as the next one.

  61. @rf
    “The blame though lies at the top, in politics, academia and the private sector. No where else”
    Really? The academics get a bashing, but not the civil service? Oh and it is all the private sector?

  62. The civil service, in terms of policy making, I would include with the government,
    Public sector workers (teachers, gaurds etc) Not so much. Private sector workers (shopowners, small scale professionals, tradesmen) Also not so much
    Thats not an opinion on public sector wages at the moment, or the need for public sector ‘reform’.
    Its an opinion on where the blame for the crisis lies

  63. @ Aisling,

    “@CB No hands are going on our Constitution. We’re simply being asked if the Government may ratify the treaty.”

    That’s why we’re having a Referendum and why AG Marie Whelan, see below. Perhaps it may have something to do with giving authority over our budget to Court of Justice of the European Union who can impose huge fines on us if we do not comply to the Borg 🙂

    “In Ireland, it falls to the Attorney General to advise the government on a whether a treaty’s ratification requires a referendum because of the above Constitutional clause. AG Marie Whelan has advised the government that it is best for Ireland to hold a referendum before ratifying the Fiscal Compact Treaty.”

    http://www.european-council.europa.eu/media/639235/st00tscg26_en12.pdf

    http://cdn.thejournal.ie/media/2012/03/20120319fiscalcompact.pdf

    NOTING that compliance with the Contracting Parties’ obligation to transpose the “balanced budget rule” into their national legal systems, through binding, permanent and preferably constitutional provisions, should be subject to the jurisdiction of the Court of Justice of the European Union, in accordance with Article 273 of the Treaty on the Functioning of the European Union; RECALLING that Article 260 of the Treaty on the Functioning of the European Union empowers the Court of Justice of the European Union to impose a lump sum or penalty payment on a Member State of the European Union which has failed to comply with one of its judgments and RECALLING that the European Commission has established criteria for determining the lump sum or penalty payment to be imposed in the framework of that Article;

    “Why are we holding a referendum? Under Article 46 of the Irish Constitution, any change to the Constitution requires a referendum being put to the people. The Attorney General must determine whether any proposed amendments are significant enough that they require a referendum for approval before being introduced into the Constitution. The new treaty’s text appeared to allow for members to adopt the treaty without it being incorporated into their constitutions. In Ireland, it falls to the Attorney General to advise the government on a whether a treaty’s ratification requires a referendum because of the above Constitutional clause. AG Marie Whelan has advised the government that it is best for Ireland to hold a referendum before ratifying the Fiscal Compact Treaty. On foot of that advice, the Taoiseach and Tánaiste announced yesterday that a referendum would be held on the issue, and that the treaty will be debated over the coming weeks. No date has yet been set for the treaty referendum.”

    http://www.thejournal.ie/the-fiscal-compact-referendum-what-are-we-voting-on-and-why-368490-Feb2012/

    Irish Constitution:

    “Article 46 1. Any provision of this Constitution may be amended, whether by way of variation, addition, or repeal, in the manner provided by this Article. 2. Every proposal for an amendment of this Constitution shall be initiated in Dáil Éireann as a Bill, and shall upon having been passed or deemed to have been passed by both Houses of the Oireachtas, be submitted by Referendum to the decision of the people in accordance with the law for the time being in force relating to the Referendum. 3. Every such Bill shall be expressed to be “An Act to amend the Constitution”. 4. A Bill containing a proposal or proposals for the amendment of this Constitution shall not contain any other proposal. 5. A Bill containing a proposal for the amendment of this Constitution shall be signed by the President forthwith upon his being satisfied that the provisions of this Article have been complied with in respect thereof and that such proposal has been duly approved by the people in accordance with the provisions of section 1 of Article 47 of this Constitution and shall be duly promulgated by the President as a law. ”

    Perhaps people need to read the treaty before deciding whether we should ratify it.

    Wakey, wakey, Aisling 🙂

    Just maybe AG Marie Whelan noticed the following in our constitution and saw the stranglehold of the treaty’s hands on 2.1:

    2. 1° The sole and exclusive power of making laws for the State
    is hereby vested in the Oireachtas: no other legislative
    authority has power to make laws for the State.

  64. @rf

    On the point of it not being a banking crisis, in a global (US) context rather than Irish

    I crossed swords with Daniel Davies myself about the role of the financial sector in the crisis in Ireland and Europe. This was before I knew he was Daniel Davies or his formerly illustrious blogging history.

    Not unlike one or two contributors here, reason leaves Mr Davies when it comes to the Financial Sector, in which he works…

    I think that at least part of the problem is that those involved in the financial sector conceive of a line between the financial markets and the financial sector which really does not exist.

    A tangent:

    I work in the technology sector at the moment and it is in midst of a large bubble which the Irish government yet again has failed to recognize as such and is duly putting many of our remaining eggs in said basket.

    However when this bubble bursts, when people look at the returns for the trillion they plan to invest in Facebook for instance, it will reflect badly not just on the technology sector but on the way the markets allocated capital and that again returns to just how unfit for purpose the wider financial sector is.

    This a crisis in our current variety of capitalism folks.

  65. “I’m sure their manners were exquisite as were their knowledge of the intricacies of front-row collapses and the breakdown.”

    Yes on both counts, but they also knew a bit about leveraged leases and US accounting requirements in relation to derivatives. Since dsquared has been mentioned it may be worth citing his comments about Ireland’s financial wizards in their brief moment of glory. If they could make an impression on him, you shouldn’t be too sure you would have seen through them:

    http://crookedtimber.org/2010/05/04/i-think-youll-find-thats-my-line-seamus/

  66. @ Bond. Eoin Bond
    “Greece, Portugal and France’s problems were not caused by banks. Either were Italy’s really, and most of Ireland’s debt is from fiscal deficits rather than banking rescues.”

    Globally and domestically the main cause for the crisis is what we’ve come to term ‘crony capitalism’. Within that context the financial sector has proven to be the primary (though not only) faultline.
    I’m not saying that ‘banks’ are to blame for everything, but as much as there was a case in the 70s that the Unions had to much political power in Western democracies, (perhaps) multiply that by (a conservative) 100 and we’re beginning to see the problems we face with public instituions captures by private interests

    “Governments are directly elected by the people, reasonably regularly.”

    With respect, I dont think this is a particularly useful way to look at the how governments and real world democracy functions

  67. @Hogan
    Goverments don’t create money under the Eurosystem….. banks do.

    Now maybe you could blame Congress over in the States for some malinvestment as they create the base money before the Banking boys over in the FED turn it into currency & debt but goverments in the eurozone only tax private sector activity.

    If follows they are working withen a certain monetary context & envoirment.
    As long as they (the goverments) accept that banks create the money they are servants of the banking oiligarghy.

    You can witness this in plain view today – with our finance minister threatening Hell, fire & Brimstone if the treaty is rejected – with the backing of the various Orcs in the Farming lobby who get the best of Grub first of course.
    This is a manifesation of pure evil.
    Europe has developed & manicured certain sections of society dependent on Euro Hobbit Meat…… its a textbook example of how you control a colony.
    The scouring of the Shire seen in plain view.

  68. @Kevin Donoghue
    Thanks for the link.

    “I’ve mentioned on a number of occasions that in actual fact, this was a policy-caused bubble, and that’s true in Ireland as well”

    I rest my case…

  69. @ RF

    “With respect, I dont think this is a particularly useful way to look at the how governments and real world democracy functions”

    This only makes sense if you make a rather sweeping generalisation that it doesn’t matter a jot who you decide to vote for, they will become corrupt and/or paid off members of crony capitalism no matter whay. Like, literally, you could vote for ANYONE and it wouldn’t matter. For this to happen, you would also probably need the bulk, if not all, of the civil service to be involved too.

    Now, im not going to say whether or not that could be possibly be true, but if it is, doesn’t it make it even more difficult to claim that this is purely a banking crisis, and not something far broader, which i had suggested repeatedly above?

  70. @Bond

    “most of Ireland’s debt is from fiscal deficits rather than banking rescues.”

    That is delusional. A few back of the envelope figures from memory:
    Bank bailout cost: ca. €75bn
    promissory notes: ca. €36bn
    GDP: ca. €150bn
    Debt to GBP before 2008: ca. 50%
    Debt to GBP end 2013: ca 120%
    NAMA liability???

    Look, even if you think the cause of the problem was somehow structural, the problem is not going to be address by reducing social welfare rates and renegotiating Croke Park. As I’ve said many times before, even if we could magic away the deficit overnight we would still have the following situation:

    – government debt to GNP around 140%.
    – private debt to GNP around 400%.
    – all our debts denominated in a non-domestic currency
    – a broken banking system not lending to the wider economy.
    – a hawkish central bank ready to raise rates at the first hint of recovery sending many households over the edge.

    There is no example anywhere in history of the above criteria being sustainable. We are not creditworthy and that will not change unless there is restructuring. We have to wake up to this fact, first and foremost. Everything else is just wishful thinking.

  71. @hoganmahew
    Of course it was a policy-caused bubble. But if the case you are trying to make is that the bankers were as incompetent as the politicians, that doesn’t help much.

  72. @Kevin Donoghue
    “Of course it was a policy-caused bubble. But if the case you are trying to make is that the bankers were as incompetent as the politicians, that doesn’t help much.”
    The case that some are making on here was that it was all the evil bankers. In which case seeing them as incompetent does indeed make a difference.

    If you believe, though, that a relatively small number of individuals who had access to both bankers and politicians (and mostly the latter) drove policy to the extent that it corrupted the economy, then you are looking in the wrong place in the banks.

  73. @bazza
    “That is delusional. A few back of the envelope figures from memory:”

    Might I suggest it is your memory that has problems with delusions?

  74. @ Bazza

    “That is delusional”

    Nope, that would be you.

    Bank bailout cost: ca. €75bn – actually 62.9bn
    promissory notes: ca. €36bn – actually 31bn and these are included in the 62.9bn cost of the banking bailouts above
    GDP: ca. €150bn – will be actually €164bn at end 2013, when debt/GDP is expected to peak at 120%.

    Cost of banking system rescue is roughly 40% of GDP (and ignores any resale of them). So roughly one third (ie 40% of 120%) of our debt burden will be due to the banking crisis. ie most of our sovereign debt, by a factor of two to one, is due to general government deficit.

  75. @ Bond. Eoin Bond
    “This only makes sense if you make a rather sweeping generalisation that it doesn’t matter a jot who you decide to vote for”

    Thats not the claim. Of course it matters on a whole host of very specific and parochial issues (what road gets built where, what hospital gets funding etc)
    On issues like financial regulation or tax policy, no it generally doesn’t matter that much. (On global issues that affect us, it doesnt matter at all)
    This is a broader issue with our political institutions (perhaps political culture, but thats a little too subjective to argue) at all levels.
    There’s a reason that country to country problems arose in very specific sectors (Ireland construction/banking, US banking, Greece bloated public sector/elite tax evasion)
    I didn’t argue that its purely a banking crisis. Just primarily. The common thread is the financial sector.

  76. It seems that many folk prefer to focus on their preferred villains so as to advance their preferred solutions, but this doesn’t get us very far. The problem is a stagnating economy.

    Dan O’ Brien did the usal hand-wringing recently in the IT:
    http://www.irishtimes.com/newspaper/opinion/2012/0427/1224315234800.html
    “Liberals say freeing up hide-bound professions and uncompetitive markets will unleash growth, while leftists are as sure that investment programmes are the way to boost economic activity. Both have a point, but the gains from these courses of action are highly uncertain in magnitude and timing.

    Opening up markets means more dislocation in the short run, which could further enfeeble already weak demand. Investing more now means more debt (and ultimately, more taxes) which could be self-defeating if it undermines confidence.”

    And ended with this frightening – and I fear quite accurate – admission:
    “The sad truth is that economists do not know a whole lot about what makes economies grow – if they did, the entire planet would be prosperous and expanding at a clip to keep everyone happy.”

    Favourable demographics and the exploitation of comparative advantages can boost growth for a time, but it is difficult to sustain. Sustained economic growth is generated by a continuous focus on productive, allocative and dynamic efficiency. And institutions of governance – political, legal, regulatory, contractual and civil society – are key to maintaining this focus.

    It is typical of Official Ireland that its denizens refuse to look in the mirror. The paucity of understanding, the lack of curiosity and questioning and the failure to confront the reality that is staring them stright in the face are truly frightening.

  77. @Kevin Donoghue

    @hoganmahew
    Of course it was a policy-caused bubble.

    I think you are being too kind here Mr D, policy is not a proxy for all the structures that exist in the economy and some of those policies which amplified the crisis were lobbied for by the financial sector.

    There is a stronger case to be made that there was a lack of policies intended to stop bubbles inflating and a very strong case that the agents in the area of the economy where the bubbles arose lobbied against it.

    I am entirely comfortable with pinning a great deal of blame for the global financial crisis on the global financial sector. They lobbied hard for the conditions that led to it, and now they are lobbying strongly that we bail them out and take the blame.

    In fact, coming full circle, we are about to sign that very idea into our constitution.

    @Bond. Eoin Bond

    Cost of banking system rescue is roughly 40% of GDP (and ignores any resale of them). So roughly one third (ie 40% of 120%) of our debt burden will be due to the banking crisis.

    So what you are saying is, absent the bailout of the financial sector, Ireland’s debt/GDP ratio of around 80% would merely be slightly better than that of well known basket cases Singapore, Canada and France? No point complaining about it then.

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    You seem like a reasonable person Eoin, do not end like Daniel Davies caught in a standing wave of cognitive dissonance. You owe the financial sector no loyalty.

  78. Mr. or Ms EWI

    So your solution to the imbalance is to “reform” away the existing rights of the older workers. Lovely.

    Thank you for your ignorant misinterpretation because it’s revealing.

    What is striking in this recession is that people like you make common cause with the gougers from the professions to grab what you can of the public pie.

    There are few if any communist nirvanas left where officially everyone has equal rights and opportunities and guaranteed employment. Even Cuba is no longer guaranteeing public jobs and no nirvana ever existed.
    Is the concept of fairness too difficult for you to understand because the truth is that it does not exist in Ireland?

    The reality is no state that aspires to more than UN food aid, cannot guarantee everyone jobs and special pension schemes. But it is possible to avoid having classes of citizens with different rights.

    @ rf

    Regulation and tax policy (etc) does not come from the public, it comes from the private interests most directly affected.

    Yes its a problem of government as well, but a government captured by specific interests (one of which, domestically and globally, is finance)
    Theres a lot of blame to go around, and its impossible to disentangle stupidity from ideology from outright corruption.

    The blame though lies at the top, in politics, academia and the private sector. No where else

    Some people may have wanted to believe that Charlie Haughey’s wealth came from the tooth fairy but many who voted for him, knew the score.

    When a majority vote for FF and a ratbag of ‘dependent’ TDs willing to support them, three times in a row, saying that voters have no responsibility for what is done or not, diminishes the role of democracy.

    When Ruairí Quinn didn’t set out to buy the 1997 election, many people likely considered him a fool and it is only because of a rare tsunami that those who benefited from his prudence have had some payback but not much – – they provided well for themselves in pensions and severance payments.

    @ Gregory Connor

    The massive property price increase was an effect of this credit inflow rather than a fundamental cause. The credit inflow caused the property price increase.

    True but in Ireland with its culture of cronyism, limited accountability, weak nominally independent institutions including the national media, it triggered a classic petroeconomy.

    @ bazza

    Rather than plucking figures from the air and double counting, go check Seamus Coffey’s data on the debt if you’re interested in the facts.

    http://economic-incentives.blogspot.com/

    It doesn’t take a genius to add up four years of public deficts.

  79. @ rf

    the question is really this – is this “just” a banking crisis? Or is it a more broad based “credit crisis” (which includes everyday attitudes to credit), on top of “growth” and “fiscal” crises simultaneously occuring, and thus magnifying the impact of the banking crisis (ie fiscal policy cannot be used to help, and growth has probably reached a cyclical peak in terms of y/y real GDP growth, so we cannot simply “grow” our way out of the crisis.

  80. @”Student of Q” aka Gregory Connor

    On Capital Flows. Agree.

    ECB refuses to acknowledge this fact. German upperechelon are latently strategic in the extreme in remaining thunderingly silent on same from which they have seriously plundered the outlying tribes … and continue to do so …

    @Bond

    Can you name an economy/society that has shouldered a banking bust of 40-50% [gdp/gnp] and prospered?

    @ECB
    We haven’t gone away – you know!

  81. @hoganmahew
    I’d agree that a relatively small number of individuals drove a policy which wrecked the economy. But one of the things which made that possible was the failure of the banks’ risk management. That isn’t something which “should surprise no-one”.

    @Shay: “I am entirely comfortable with pinning a great deal of blame for the global financial crisis on the global financial sector.”

    Me too, which is why I’m not in sympathy with John McHale and some of his bank-friendly (or at least bank-indulgent) commenters.

  82. @ Shay

    the question was what proportion of our debt is down to the banking crisis – about a third. That means two thirds is down to general deficits, and around half of that has been taken on in the last five years, ie 50% of the deterioration in our debt position has been thru a mismanaged fiscal framework intersecting with a cyclical crash, and 50% has been due to direct costs of recapitalising our banking system. My point is very simple – there are numerous reasons and dynamics for the problems both Ireland the broader Western world currently faces. Would that they were as simple as being caused by “the banks”. As repeated ad nauseum, this isnt so as to apologise for the banks, but simply to highliht the myoptic (and yet blazingly clear) idiocy of thinking that fixing the banking system will in one fell swoop fix our economies.

  83. @ Bond. Eoin Bond

    “is this “just” a banking crisis?”

    No, its never just one thing. But once again the word primarily is useful.

    @ Michael Hennigan

    “When a majority vote for FF and a ratbag of ‘dependent’ TDs willing to support them, three times in a row”

    At this stage, taking into consideration how destructive this crisis has become, and the interests (both domestic and global) that have shaped the policies that caused the crisis and held back the recovery, I dont think there is any use blaming something as difficult to quantify as voters.
    If nothing else it is a diversion from having us actually deal with the situation we find ourselves in

  84. @Kevin Donoghue

    Me too, which is why I’m not in sympathy with John McHale and some of his bank-friendly (or at least bank-indulgent) commenters.

    Absolutely, I genuinely thought that you were being too reasonable in a situation where a little righteous anger might be appropriate, but I might be prone to fits of uncontrollable anti-crony capitalist rage.

    I really don’t think this world-weary, “sure we always knew they were gobshites” approach is a good one, in terms of understanding the past or planning for the future.

    +1

    Neither the agents of the financial sector or the members of the European branch of the Church of Neoliberalism intended for things to go as disastrously wrong as they have but they are quite determined not to take the blame for it. The defeated shoulder shrugging “we all partied, they are all as bad as each other” attitude you identify will help them escape and even prosper.

  85. @ RF

    i think what both myself and MH are getting at is this – if we manage to put all the blame for this crisis rather simplisticly on either the banks or the ECB, which people are so keen to do, as opposed to general attitudes to debt/leverage from both people and their governments, or the generally bad domestic fiscal and economic governance we are so used to in this country, do we have any hope in hell of learning from our mistakes? Thats not seeking to “blame” voters, as much as show the dangers of picking the easy political choice.

    The banking bust is a huge part of the last few years economic collapse, but even without it, we’d still be in trouble, or, rather, even if it was incredibly prudently managed, the financial sector would still probably be in trouble because of broader economic issues we’re unwilling to face up to.

  86. @ David O’Donnell

    Can you name an economy/society that has shouldered a banking bust of 40-50% [gdp/gnp] and prospered?

    Argentina 55% in 1980

    Indonesia 57% in 1997

    Turkey 32% in 2000

    They all seem to be doing OK — Mrs. Kirchner is facing some headwinds (maybe of her own making) but the good news is that there’s a shortage of soybeans and the Chinese are ravenous.

    As for the rest, Turkey should show Greece what can be achieved if the gougers are sent packing.

    Indonesia – – don’t find yourself in Jakarta in the rush hours (not hour).

    TERMS & CONDITIONS APPLY – – country comparisons should be treated with caution.

  87. @Bonf Eoin Bond

    As repeated ad nauseum, this isnt so as to apologise for the banks, but simply to highlight the myopic (and yet blazingly clear) idiocy of thinking that fixing the banking system will in one fell swoop fix our economies.

    I agree but I do not think that the other economic problems can be solved without at least starting the process of lancing the financial system/sector boil.

    Our current path is instead to try and preserve the current dysfunctional financial system/sector at all costs and it seems both hopeless and horribly misguided.

  88. @Hoganmahew

    re “this was a policy-caused bubble, and that’s true in Ireland as well..”

    Followed by a policy-caused implosion!

  89. @ Bond

    “promissory notes: ca. €36bn – actually 31bn and these are included in the 62.9bn cost of the banking bailouts above”

    Actually no, €30.60bn plus interest ¢16 bn total €47 bn

    “Cost of banking system rescue is roughly 40% of GDP…”

    On the contrary, the full bill for the banks is not yet in. Its likely they will require further capitalisation. Banks are heading for further bailouts with rising private debt levels, mortgage defaults.

    Hidden cost of upward only rent reviews stifling the economy, again the bank’s balance sheets have a stranglehold on these. If legislation reduces upward only rent reviews, balance sheets of the banks go down further.

    Re “when debt/GDP is expected to peak at 120%….” This figure will be broken if we require further bailouts. Debt/GDP ratio is already rising to unsustainable levels and that peak with our growth rates is likely to be breached.

    Consider the following:

    http://trueeconomics.blogspot.com/

    (Friday, April 27, 2012
    26/4/2012: One interesting point on Fiscal Compact 1/20 rule)

    “Say, Ireland’s debt/GDP ratio peaks at 120% GDP (I am rounding up the actual forecasts here). Under ‘interpreted’ adjustment mechanism, we would be expected to reduce the overall debt by 1/20th of 120% minus 60% or by 3% of GDP in year one. Under the actual Treaty, we are expected to reduce it by 1/20th of 120% or 6% of GDP in year one. Say our GDP is 175 billion in that year. Under interpreted rule, we have to find €5.25 billion to reduce debt levels, under actual Treaty language, we are expected to come up with €10.5 billion. To put this into perspective, the average level of gross investment in the Irish economy is forecast by the IMF to be around 10%pa between 2012 and 2017 or ca €17.5 billion under above assumptions. This means that the Fiscal Compact adjustment path would take out 60 percent of the entire annual investment in the economy. That is hardly a chop-change of a difference.”

    Gurdgiev’s interpretation that “we have to find €5.25 billion to reduce debt levels” stretches it a bit based on 1/20th of 120% or 6% of GDP in year one under the treaty; a more correct interpretation in my view, is 1/20th( 120% – 60% ) but lets put the jury out on that one, we need ca €3 – €6 bn deficit reductions taken out of the economy ” 60 percent of the entire annual investment in the economy”

    In summary, The static interpretation does not apply to the current dynamic and evolving decline and deterioration in the state’s finances and its obligations going forward.

    The sum total for the costs attached to our banking collapse is rising all the time.

    Unfortunately, there are self reinforcing aspects with overlapping costs that worsen both the balance sheets of the banks and those effecting the GDP and general government deficit. We are at the unsustainable point where that 120% will need to be revised upward. This is the point we are at now as GNP collapses and the Central Bank issues concerns over property prices overshooting the bounds of sustainable recovery.

    Noonan needs to clarify if our obligations require ¢3bn or ¢6bn clawed out of our economy in next budget. Give us the austerity figures based on current growth projections.

    Its clear to me the above figures are unsustainable and require a restructuring of our debt. Without such restructuring, The Fiscal compact consigns Ireland to the debtors prison.

    Its about time we got out of the trap and left the euro based on a return to sterling and a fair determination of how much of this economy’s debt levels this economy can pay back. You’ll have to make up your own mind but to date there is sparce information being given out as to what the choices are. It would appear they’d rather not let you think about these matters.

    (Interesting if the UK and sterling got a heads up on the euro by returning to the gold standard)

  90. @ Bond. Eoin Bon

    I’m all for a complex and multifacted explanation of the crisis and the continuing (non) response. But (this is not directed at you) that isn’t what we have had.
    Whenever genuine institutional reform has been mentioned, it is dismissed (particularly on this site) as being somehow irrelevant. Instead we fall back on lazy cultural sterotypes, parish pumps politics or public sector wages. All of which are important, but in the bigger picture insignificant. (Well functioning institutions are far more influential on policy making than cultural norms)
    So we have a situation where we’re being asked to vote on a fiscal treaty that noone thinks will solve the crisis, to remain in a monetary Union that most see as dysfunctional, and the best we are offered is the ‘realist’ perspective of milk the EU for all its worth and get out. No doubt in a few years when crisis hits again, it will be the voters fault for accepting the treaty.
    We need to seriously look at why we are failing so miserably to deal with this crisis, or even coming up with a half way decent alternative. And part of that is domestic, but the vast majority is international.
    And, in my opinion, the primary barrier to genuine reform is a financial sector that has become far to powerful politically.

  91. @ Colm

    “Actually no, €30.60bn plus interest ¢16 bn total €47 bn”

    Ridiculous reasoning. Why don’t you loan yourself some money and double your income?

    “This figure will be broken if we require further bailouts”

    Actually, it probably won’t be. As i suggested elsewhere, its highly likely that Bailout 2.0 will involve large primary surpluses in year one. While the impact on growth will be difficult to figure out, the purpose of Bailout 2.0 would be for a sharp reduction in debt/GDP levels at all costs.

    “Interesting if the UK and sterling got a heads up on the euro by returning to the gold standard”

    Not even sure where to go on that one given their enourmous QE program and flexibility shown by having a free floating currency. The UK is about as far away from the gold standard as any western economy can currently get. They are printers beyond compare.

  92. Not to mention an ideology that has become divorced from reality disseminated through a variety of think tanks, newspapers and general opinion formers funded by wealthy interests.

  93. @Michael Hennigan

    Did all 3 default? I should have been more specific – ‘prospered without defaulting; above.

    @all

    Crisis goes beyond banking – a crisis of governance at many levels [much still unchanged] and a crisis of failed institutions …. most amazingly – NO Real CHANGE … yet.

    @all

    The Fiscal Compact – informing the 50% who don’t understand it

    OK, so according to the Sunday Times Behavioural and attitudes Survey on the 22nd April 50% of the electorate/those intending to vote (not sure which) in the upcoming Fiscal Compact referendum apparently do not fully understand the Fiscal Compact (downloadable here). This is a worry for me because if you are going to vote on something that will have profound implications for your fellow citizens you owe it to yourself and the rest of the country to fully inform yourself as to the implications of the treaty. Afterall, would you sign a contract without knowing it’s terms? Well, I suspect the answer would be no and as such therefore you should be approaching the fiscal compact with the same mindset. It is a contract between this state (through it’s citizens) and the EU.

    http://www.irishleftreview.org/2012/04/30/fiscal-compact-informing-50-dont-understand/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+irishleftreview%2Ffeed+%28Irish+Left+Review%29

  94. @Bond

    Ok, it was erroneous of me not to include the cost of the ELA in the bank bailout costs. But that still leaves a bank bailout bill of 40% of GDP or about 45-50% of GNP. That is an absolutely massive figure.

    I don’t think that anyone ever claimed on here that the sole cause of the crisis were the banks. Everyone knows that the Bertie the socialist was also part of the problem as was the regulator. But to deny that we in the midst of a banking crisis in Ireland is ridiculous.

    @Michael H, Hogan, EB

    Regardless of how we got here, can you please respond to my second point, namely:

    Even if we could magic away the deficit overnight we would still have the following situation:

    – government debt to GNP around 140%.
    – private debt to GNP around 400%.
    – all our debts denominated in a non-domestic currency
    – a broken banking system not lending to the wider economy.
    – a hawkish central bank ready to raise rates at the first hint of recovery sending many households over the edge.

    There is no example anywhere in history of the above criteria being sustainable. We are not creditworthy and that will not change unless there is restructuring either within or without the Eurozone.

  95. @ Shay Begorrah

    I genuinely thought that you were being too reasonable in a situation where a little righteous anger might be appropriate.

    You risk being a Taliban – – rejecting a modern life and wanting it.

    There is nor has there ever been a perfect system.

    Globalisation has its defects and casualties; Ireland would have remained a backwater without it. The decision of western countries to almost eliminate industrial tariffs has lifted many out of endemic poverty including hundreds of millions in China.

    Prof. Michael Spence’s Commission on Growth & Development has said that since 1950, 13 economies have grown at an average rate of 7% a year or more for 25 years or longer. At that pace of expansion, an economy almost doubles in size every decade.

    Growth of 7% a year, sustained over 25 years, was unheard of before the latter half of the 20th century. It is possible only because the world economy is now more open and integrated. Each and every one of these growth miracles had an export sector as a driver of growth and an increasing share of trade in GDP. There are no exceptions.

    These countries are: Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan, and Thailand.

    If you lived as a hermit on Sceilig Mhichíl, I would respect you in rejecting all the isms but I guess that you’re taking advantage of some of the benefits of inexpensive consumer electronics and if you needed to, a drug that would prolong your life.

    There is always a lot to be annoyed about unless one is a big scrounger in the system and rising inequality in particular in the US cannot be positive in an economic system.

    However, there are different shades rather than all black.

  96. @ Bond

    “if we manage to put all the blame for this crisis rather simplisticly on either the banks or the ECB,…”

    I think you are engaged in a bit of a coverup there 🙂

    This is not simplistic at all. That’s why we require a full, open investigation into the running of the banks up to the guarantee. We need to follow the money of the 10 leading property developers and extend the inquiry later. We need to investigate the relationship between the Regulator and Seanie/Drumm and the upper levels in the banks.

    We need PAC or some other body in open session to show the trail of the guarantee and where the imperatives for the disaster came from. ”

    It appears from the coverage of whistleblower Marie Mackle that senior officials in the DoF suppressed information that ought to have been included in speeches by Cowen and incorporated into Govt policy.

    All we get is coverup and the embarrassing and rather pathetic attempts to pass blame for the mess onto the general public. If they fall for this propaganda, they might feel less sore about being asked to foot the bill for the mess including the salaries, perks, promotions and stability for those responsible.

    Come on ? 🙂

    Times don’t change, the proponents of austerity:

    “What need you being come to sense,
    But fumble in a greasy till,
    And add the halfpence to the pence
    And prayer to shivering prayer, until
    You have dried the marrow from the bone?
    ….”

    Now the constitution itself is up for sale by the same bozo greasers above who’ve wrecked the place !

    Vote No and don’t let them get their hands on your constitution 🙂

  97. @bazza
    “There is no example anywhere in history of the above criteria being sustainable. We are not creditworthy and that will not change unless there is restructuring either within or without the Eurozone.”
    What do you want me to say that I haven’t said elsewhere beginning with the f-word? And saying it for a number of years now?

    Have you just realised this now?

    “Even if we could magic away the deficit overnight”
    The chances of this happening is nil. The continuation of such a large deficit… see your point above.

  98. We need to move on from the Celtic Tiger triumphalism that painted everyone to the left of Michael O Leary a communist.
    Some aspects of globalisation have indeed been good, others not so much.
    The success of Brazil, India China etc (and lets not get ahead of ourselves, we will come to see how sustainable their systems are) could also be sold as strong state beuracracies directly making economic decisions.
    Of course no system has every been perfect, but some are better than others. The post war social democratic order worked quite well, but was also probably the result of very specific demographic and societal forces that can’t be recreated.
    Being ‘on the left’ does not make you anti modern. In fact most major technological changes are originally funded by governments (as the only entity capable of taking the financial risk, or through university research) and then privatised.
    And we need to begin from the understanding that like all social and economic systems, capitalism is not sustainable in the long term. That doesnt affect our response to the here and now, but it will keep us humble

  99. @ David O’Donnell

    David,

    I have only time to give the following:

    Since 1997, there have been 20 sovereign defaults on government bonds.

    Defaulters had high foreign currency exposure, an average of 76% of total debt was in foreign currency in the year prior to default, and high debt servicing costs.

    According to Moody’s countries with high economic resiliency, debt that is predominantly denominated in domestic currency and strong political institutions have historically been successful in managing relatively large debt burdens and eventually reversing increases in debt-to-GDP ratios caused by macroeconomic shocks and banking crises.

    Countries: Mongolia, Venezuela, Russia, Ukraine, Pakistan, Ecuador (twice), Turkey, Ivory Coast, Argentina, Moldova, Paraguay, Uruguay, Domenica, Cameroon, Grenada, Dominican Republic, Belize, Seychelles and Jamaica.

  100. @ Michael Hennigan 2:26

    Above points you make there very well made and entirely valid. Unfortunately, they do not address the real dangers of euro collapse and possible dollar collapse. Rising unsustainable debt levels have been a hidden cost of the benefits you mention; these costs are mounting. It is the solution to the current issues involved that focus should be given. The danger is such points may justify and sustain policies eg austerity that are entirely inadequate solutions to the answers that are really required; they may also be used to vaiidate and enhance the problems that have given rise to the current economic crisis. In Ireland, short memories of the celtic tiger years have led to NAMA’s mistaken attempt to copper fasten and recreate conditions in the previous housing bubble by refusing to mark to market until that market returns.

  101. @Shay
    “I work in the technology sector at the moment and it is in midst of a large bubble which the Irish government yet again has failed to recognize as such and is duly putting many of our remaining eggs in said basket.

    However when this bubble bursts, when people look at the returns for the trillion they plan to invest in Facebook for instance, it will reflect badly not just on the technology sector but on the way the markets allocated capital and that again returns to just how unfit for purpose the wider financial sector is.”

    Interesting article on the tech sector manufacturing business….We get a mention….
    http://www.reuters.com/article/2012/05/01/us-semiconductors-manufacturing-idUSBRE8400N920120501

    Another cause for concern is a report out yesterday about Apple and their tax avoidance strategy as reported in the NYT and the major TV networks.
    Ireland is shown as a major destination for Apple’s strategy along with the Netherlands. Apparently they paid 9.8% tax last year.

    We must also be wary of dependence on Pharma. Lipitor sales down 15% and a new ED drug approved yesterday…apparently it works faster and consequently is probably destined to be more popular than the ones manufactured in Ireland.
    Caution all round..

  102. @ Bazza

    Im not denying that a banking crisis forms part of the overall crisis, but events have now far surpassed this being aptly described as being simply a banking crisis.

    I’d liken the use of the term “banking crisis” to what one might have said about the early part of WWII. Without going into the long and complex historical timeline, in simple terms it started out as a set of individual conflicts, before eventually morphing into what we now know as WWII. Likewise the problems with the banks are one part of our current economic crisis, but so to is the lack of jobs, the lack of growth, the fiscal imbalances, the flaws within the EZ, the general reliance on leveraged credit for a solution to the problems with one or all of the above. The banking problems are simultaneously both a cause and a symptom.

  103. http://www.koreatimes.co.kr/www/news/biz/2012/04/346_109456.html

    “It is also significant that big financial collapses occurred again in the 1970’s, after being virtually absent in the 1950’s and 1960’s, when the Keynesian system of managed economies and the Bretton Woods system of managed exchange rates was in place. The major post-war crises that Reinhart and Rogoff consider run from 1977 to 2001. They occurred because regulation of banks and controls on capital movements were lifted; they were shorter than in the 1930’s because the policy responses were not idiotic….
    Moreover, the eurozone itself is a mini-gold standard, with heavily indebted members unable to devalue their currencies, because they have no currencies to devalue. So, given that Chinese growth, too, is slowing, the world economy seems destined to crawl along the bottom for some time yet, with unemployment rising in some countries to 20 percent or more….
    With fiscal, monetary, and exchange-rate policies blocked, is there a way out of prolonged recession? John Geanakoplos of Yale University has been arguing for big debt write-offs.”

  104. Are the Government gettin desperate…

    “Minister for Finance Michael Noonan has today warned he will have to introduce a tougher budget that will include tax increases if the public rejects the Fiscal Treaty Referendum.”

    Blackmail is never a good strategy…it tends to backfire.

  105. @ John McH “it is also important to look at what is in front of us now.”

    Whatever about what has happened in the past, my concern from this point forward is that Ireland is entering (or indeed has already entered) an escalating downward spiral into increasingly difficult-to-recover insolvency. As Mr. Summers says, if growth remains below interest rates, debt will continue to accumulate and will eventually reach irretrievable levels (if that point hasn’t already been reached by Ireland).

    Given however the generally deteriorating Irish economic indicators and rapidly deteriorating external environment, and given that a properly functioning lender of last resort ECB is not likely possible to reinflate Euroland, how do you see “what is in front of us now” beyond the short term “fix” of liquidity relief to be provided under the FC (assuming a yes vote)? What is your vision of where recovery will come from? From what I read here, you appear to be simply betting that the debt markets will somehow be turned in Ireland’s favour by strict adherence to the current austerity plan (or is that too simplistic a vew of your thinking?).

    I don’t know myself – it is very difficult to see the emergence of an engine of growth developing under the current deteriorating circumstances for a wider base than the privileged few who are positioned to take advantage of the current crisis at the expense of the wider nation. The current programme appears only to envisage a much smaller core (economy) that will survive at the expense of much of the wider population…..chopping off the limbs to save the core body (for the benefit of the few).

  106. “According to Moody’s countries with high economic resiliency, debt that is predominantly denominated in domestic currency and strong political institutions have historically been successful in managing relatively large debt burdens and eventually reversing increases in debt-to-GDP ratios caused by macroeconomic shocks and banking crises.”

    Is the point, in the immortal words of Meatloaf:
    “Now don’t be sad, ’cause two out of three ain’t bad”?

    We definitively don’t have a domestic currency. For most practical purposes that are relevant to debt sustainability, the euro is a foreign currency.

  107. @Paul W:

    You’re right, we are locked into a downward spiral.

    The only answer is to get out of the euro, devalue our new currency and get some growth going.

    Growth will resolve most of our (financial) problems.

  108. FYI Lucinda’s Logic Bk2, viii

    The [Fine Gael] press conference was chaired by Minister of State for European Affairs, Lucinda Creighton who said: “I believe passionately in voting Yes, because so many of my friends of my generation now live abroad.”

    She said there was “a moral obligation” to vote Yes, to help ensure that young people had a future.

    “This decision is about people, not party politics or ideology,” Ms Creighton said.

    She said she wanted to “acknowledge the help and support from Fianna Fáil”.

    “Fianna Fáil should be given credit for their stance,” she added.

    http://www.irishtimes.com/newspaper/breaking/2012/0501/breaking46.html

    No comment!

  109. George Orwell grasped the political importance of nonsense long ago, in his still scary satire, Nineteen Eighty-Four. He referred to it as Duckspeak. The essence of Duckspeak is to lower the intellectual level of the conversation, spread confusion and allow the speaker to get away with something. Duckspeak was a refined version of the official language of Oceania, Newspeak. A good Duckspeaker could change his party line in mid-sentence while being quite unaware that the second half of the sentence contradicted everything in the first half. This ability was very much valued by the ruling Party. Newspeak was specifically designed to eliminate independent thought, and was essentially an impoverished version of the English language. “Newspeak was designed not to extend but to diminish the range of thought.” Tom Garvin

    http://www.irishtimes.com/newspaper/education/2012/0501/1224315400547.html?via=mr

  110. @ Bond 2:12

    ““Actually no, €30.60bn plus interest ¢16 bn total €47 bn”

    Ridiculous reasoning. Why don’t you loan yourself some money and double your income?”

    I’m surprised you made that point. I thought you were on KW blog on this here:

    http://www.irisheconomy.ie/index.php/2010/10/19/budget-calculation-update-promissory-note-interest-payments/

    The irony is we are not only loaning ourselves money as you suggest but we’re also charging ourselves interest on it!

    From KW:

    “On Prime Time this evening, Joan Burton and government junior minister Billy Kelleher agreed that the annual interest cost of the promissory notes was going to be €1.5 billion. With €30 billion or so in notes issued, it now appears that the notes have an interest rate of 5%.

    Now, as far as I know (and I’m happy to be corrected) these promissory note interest payments of €1.5 billion a year will count against the general government deficit.”

    I disagree UK as far away from the gold standard as you imply. Returning to it won’t not mean UK could not devalue or do a QE; the only difference being it would have to monetize any changes against the exchange rate fixed by gold. We could do the same if we so wished.

    Re “Actually, it probably won’t be. As i suggested elsewhere, its highly likely that Bailout 2.0 will involve large primary surpluses in year one. While the impact on growth will be difficult to figure out, the purpose of Bailout 2.0 would be for a sharp reduction in debt/GDP levels at all costs.”

    I believe the above is pure cockamamie fantasy. You are hoping of a big cash injection from the ESM or elsewhere so big that the government will turn its deficit into a surplus. Leaving aside what the government wishes to invest in, or can invest in, you are hoping that large chunks of the money will roll into the vampire financial sector in Ireland.

    I mean this is pure delusory nonsense? It would be like someone defaulting on their mortgage being offered a vastly higher loan to help them with previous repayments on the past loan plus allow them to burn the money on another property even more costly than the present one they can’t afford !

    I won’t even delve into the financial costs of a second bailout.

    This is the nonsense being offered by the Irish government to the Irish electorate.
    Don’t let them get their hands on the Irish constitution or you’ll pay heavily for this ponzi scam !

    We’ve a bailout we can’t pay back. We’ve no need for a second bailout. We could do with a restructuring of the current one. A better option is to leave the euro and rejoin sterling, negotiate on what can be paid back and leave the unstable euro mess behind !

  111. @DOD
    From your link

    Responding to a question as to whether the Government was engaging in “scare tactics”, arising from comments made earlier by Minister for Finance, Michael Noonan, he replied: “Fine Gael will not involve itself in scare tactics.”

    He added: “Minister Noonan, above anybody else, has had the unprecedentedly difficult challenge of facing an economic mess that no other minister before him ever faced.”

    So more taxes if you vote No…. Is not scare tactics
    I have a recollection of similar scare tactics from the same source that backfired spectacularly.

  112. @ Bond

    Anyways, not to get too sidelined by the promissory note interest rate issue here’s the update on its EFSF replacement a proposed EFSF low cost bond issue for ¢28 bn they will probably release for propaganda and public edification around the middel of this month:

    http://www.rte.ie/news/2012/0403/notes-solution-could-be-reached-by-mid-may.html

    I don’t see any trumpets and fanfare for this bond sticking the Irish taxpayers for the bill of IBRC which should be written down and thrown in the bin !

  113. Bazza et al.

    I don’t think that anyone ever claimed on here that the sole cause of the crisis were the banks.

    I have seen many, many articles and posts that start “There are those who claim that the sole clause of the crisis was the banks, but they are wrong, and here’s why….”. Yet I have never seen one of those articles that actually says that the sole cause was the banks. Perhaps I’m looking in the wrong place, but I suspect it is because such articles don’t exist. This is simply a strawman that is being attacked, since it is easier to attack a strawman than the actual positions taken.

    More generally there is a widespread view among media commentators that represent/support the “official Ireland” viewpoint that to somehow recognize and discuss the broader problems, and the solutions needed, including changes to the Euro architecture, relationship of banks to sovereigns, role of inflation in alleviating a debt and growth crisis, economic identities that pertain to growth etc. etc. would somehow muddy the waters, confuse and distract the masses, and somehow undermine support for some of the necessary reform steps. At heart this is an elitist and arrogant attitude.

    It has got to the point where nearly all the useful analyses of the problems in Ireland, and the solutions to them, are coming from outside Ireland.

  114. @ Colm B

    “The irony is we are not only loaning ourselves money as you suggest but we’re also charging ourselves interest on it!”

    You clearly don’t understand how the PN works. The interest rate is more or less irrelevant in the long term, and Karl has been very vocal about that point – its one arm of the state paying another. The only costs for the PN are the principal and the underlying rate which IBRC is paying for ELA. Or around 1-2%.

    “Returning to it won’t not mean UK could not devalue or do a QE; the only difference being it would have to monetize any changes against the exchange rate fixed by gold.”

    Aside from the treble negative, what would the point of a debaseable gold standard be? It would be self-defeating, no one would trust its “value” if you could just debase it by printing. Basically it would be like having a currency peg that you admitted you may not keep. It would be one of the more insane monetary policies to implement.

    “I believe the above is pure cockamamie fantasy. You are hoping of a big cash injection from the ESM or elsewhere so big that the government will turn its deficit into a surplus. Leaving aside what the government wishes to invest in, or can invest in, you are hoping that large chunks of the money will roll into the vampire financial sector in Ireland. ”

    What? you literally understood that as the opposite of what was a fairly simple point – Bailout 2.0 will see spending cuts and tax hikes of a magnitude required to get rid of the deficit on Day 1. Im expecting the amount of money from the ESM to be the absolute minimum to repay maturing debt.

  115. @Bryan G

    “I have seen many, many articles and posts that start “There are those who claim that the sole clause of the crisis was the banks, but they are wrong, and here’s why….”. Yet I have never seen one of those articles that actually says that the sole cause was the banks. Perhaps I’m looking in the wrong place, but I suspect it is because such articles don’t exist. This is simply a strawman that is being attacked, since it is easier to attack a strawman than the actual positions taken. ”

    I imagine “those who claim that the sole clause of the crisis was the banks” are hiding in the woodpile with “those who would still be claiming Croke Park beneficiaries were overpaid even if they worked for free”.

  116. CetPar,
    Perhaps you could identify what fund we can draw on, how much we can draw, what rate , term and terms attaching in the event of a No vote.
    The irony is that most of the lefty no vote opposed the bail out and called for the Troika to depart but at the first sign that they might not be around they squeal.

  117. @ Bond,

    I’ll take your points in reverse order:

    “Im expecting the amount of money from the ESM to be the absolute minimum to repay maturing debt…”

    Good luck on that. I suppose ther’s no harm expectin a giant windfall to wipe the deficit in one go with a big surplus you can invest in the Lotto that will pay off big time to pay for the giant loan involved. That’s Jack in the Beanstalk cockamamie fantasy being sold by FG/LB, no element of this has been agreed or even discussed by the troika or anybody apart from yourself.

    Re “- its one arm of the state paying another.” I know the difference between ELA and PN’s and have debated the issues involved on previous blogs. I disagree with you but unfortunately I can’t give structured figures from ECB who ought to be final arbiter. What I can do and have done is point to the technical discussions underway in the RTE link above regarding a low interest bond at ¢28 bn, note ‘low interest’.

    Now replacement of alleged ¢28 bn debt through ELA exchanged through the medium of promissory notes to be replaced with a bond including interest, would not make sense if not for the gain to be got by the bond reducing the weight of interest repayable under ELA interest rates. You seem to have some confusion grasping this point in the link I gave above to Karl Whelan blog discussion, in one of your comments there.

    RE “no one would trust its “value” if you could just debase it by printing” Not true, the IMF itself was founded at the time of the setting up of Bretton Woods, its part of a system of currency controls that prevent debasement, their role is to step in when there’s a mess to be cleaned.

    “Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.” A problem would be that Gordon Brown sold a lot of UK gold at knockdown prices compared to today. I’m not a goldbug but Rules above would preclude debasement. UK itself after the second world war proposed a http://en.wikipedia.org/wiki/Bancor . The Bancor more recently as based on a bundle of precious metals has been gaining traction. It’s certainly not inconceivable to see its return if inflation takes hold due to LTRO/QE1/QE2 and next up QE3 currency debasement. ” Under gold or the bancor, QE would still be possible merely means to eg double the money supply but you reduce its value by a proportionate amount, 2 dollars worth a previous 1 dollar, which is what we have. Likewise a currency could decide to devalue. The benefit is that a currency is no longer tied to influence outside its own control.

    There’s no doubt we’re heading for a recall of Bretton Woods.

    Re your problems with my triple negative wont not mean 🙂 Sorry rushing. But if you are being picky, perhaps you need to address your spelling ‘simplisticly’ above would lose the spelling bee and should be ‘simplistically’ 🙂

  118. @ Bryan G “It has got to the point where nearly all the useful analyses of the problems in Ireland, and the solutions to them, are coming from outside Ireland.”
    +1

    The most disturbing part of this is the ostrich behaviour towards the possibility and the consequences of a no vote to the FC. As has been stated before, no one appears to be planning for that scenario. Hence the no vote itself will get blamed for adverse consequences that should otherwise have been planned for, mitigated or eliminated in advance. The Yes camp has been thoughtlessly (in the main) assuming all along that it will prevail on the basis that enough people will conclude “I’m alright, Jack” and take the money, despite the beggaring of so many of their neighbours. They have no vision of a future, fair Ireland for all (or even a substantial majority of all) the people. The current strategy is just “Law of the Jungle” whereby the “fittest will survive”. They may be surprised yet that many in Ireland still believe and wish to live in a more civil society than that.

  119. @ Colm B

    the structure being discussed via the EFSF is chiefly about delaying cashflows, both in terms of principal repayment as well as impact on deficit. OVERALL though, the interest rate on the EFSF structure will potentially actually be marginally higher than the net interest rate currently underlying the promissory note/ELA structure. Like i said, you dont seem to understand the net flows underlying the various structures.

    And we’re nowhere near going back to Bretton Woods. What we’ve seen in the crisis is that those economies with full and flexible use of monetary policy have fare the best. We may try and see more coordinated monetary policies in teh future, but every country will now see the massive benefits of having independent monetary/FX policy. Bretton Woods essentially gave up sovereignty over monetary policy to the IMF, so its strange that you would advocate such a situation taking place again (to the IMF or to the UK), despite railing so hard against the loss of sovereigny you perceive we have suffered to Europe.

  120. @ Michael Hennigan

    Thank you for your ignorant misinterpretation because it’s revealing.

    What is striking in this recession is that people like you make common cause with the gougers from the professions to grab what you can of the public pie.

    There are few if any communist nirvanas left where officially everyone has equal rights and opportunities and guaranteed employment. Even Cuba is no longer guaranteeing public jobs and no nirvana ever existed.
    Is the concept of fairness too difficult for you to understand because the truth is that it does not exist in Ireland?

    The reality is no state that aspires to more than UN food aid, cannot guarantee everyone jobs and special pension schemes. But it is possible to avoid having classes of citizens with different rights.

    Blablablah. So, basically, I was exactly right. You *are* advocating (under cover of concern-trolling) that workers’ rights be taken away.

  121. Fiscal causes and consequences…

    I did a search in the op and the word cause appeared a couple of times, the word consequence only in the title..

    For a certain class of people, there are no consequences….

  122. @ BEB

    “Like i said, you dont seem to understand the net flows underlying the various structures.”

    You contradict yourself. On the one hand, you suggest its interest rate we pay to ourselves suggesting it doesn’t exist. Now you agree on my points re interest rates applying to the ELA/PN arrangement proven by the flagging of EFSF bond currently taking place. They’ll fanfare as saving us a triumphant few Bob on repayment of odious debt that should be written off. I’ve given you the approximations re interest, ¢16 bn according to KW. You are talking about extending maturity dates
    on the current EFSF delusion even though you correctly see that “marginally higher than the net interest rate currently underlying the promissory note/ELA structure”.
    So, overall I would agree with you, in my words, they’ll stick us with an EFSF bond that will end up costing more than the PN/ELA structure, but extended maturity dates will bring down annual repayments.

    You’ve got this leprechaun crock of gold notion about ESM bazooka that will generate a surplus in year one.

    Let me give you a tip off. They’ve got their eye on the IFSC, Sarkozy let the cat out of the bag there, but they shut him up on that. Soon as they get the European Court of Justice bailiffs on board and have sucked the marrow from the bone of the taxpayers, guess who’s door they will be knocking on big time, IFSC. Big rise in Corporation Tax and end to Ireland as a tax haven.

    There is no ESM bazooka. IFSC will be led to the Irish Glue Factory along with Irish taxpayers. The Irish financial services industry will be handed the bill for the mess.

    Very disappointed you’ve fallen for the Y stuff. Perhaps hubris makes you believe you can manage with FG/LB to avoid the above and not join ‘fools rush in…’ Good luck with that !

  123. @ TullMcAdoo

    Re “Perhaps you could identify what fund we can draw on, how much we can draw, what rate , term and terms attaching in the event of a No vote.”

    I would call this the “Iceland Fund”. The person you should contact for more info,
    Ingmar Grimsson. List of participants could be quite long:

    1. IMF
    2. UK
    3. US
    4. Canada
    5. Russia
    6. China
    7. Norway
    8. Sweden
    9. International Bank for Reconstruction and Development
    10. Bank for International Settlements

    Negotiations would take place on debt write down with the ECB.

    As soon as you raise the above with the ECB, they’ll race to offer write down of IBRC debt or try to persuade you, you don’t understand the capital flows a 15 yr old can understand. Just tell them the Irish Constitution is not for sale and they need to take their hands off it 🙂

  124. @EWI

    Blablablah. So, basically, I was exactly right. You *are* advocating (under cover of concern-trolling) that workers’ rights be taken away.

    It is the Colonel Kurtz school of social and economic policy making – there is a race to the bottom, lets win it! (Herr Scauble would Hartzilly agree.)

    Under the same heading you will also find:

    * If we do not give away our freedoms they’ll be taken.
    * Defeat is a certainty unless we unconditionally surrender.
    * Ireland can only preserve its influence in Europe is by doing exactly what it is told.

  125. @ EWI/ Shay Begorrah

    It’s interesting to be termed a troll by two individuals who are afraid to reveal who they are.

    How brave both of you are!

    I have been consistent on policy issues through boom and bust when shock horror the two of you may have been groupies of Bertie Ahern.

    Within the tent, the left and right were cheerleaders as some were in Bundoran in 2007 when Ahern wondered why some people like me didn’t commit suicide.

  126. I see that the Fiscal Council is being pulled into this despite Professor McHale’s apparent wish for the Council, as a council, to remain detached from the debate. RTE reports

    “Speaking in Brussels, Mr Noonan insisted that planning the next budget would be made more difficult and that if growth or confidence in the economy were lowered by a No vote then the government would be advised both by the Fiscal Council and the external EU-IMF authorities to “speed up the progress of adjustment.””

    Now no-one disputes that if the Council were to see growth or confidence dip after May 31st then the Council would presumably step in if it felt the Government would not meet its targets. But by being referred to in this way, the impression given is that the Fiscal Council accepts that a “no” vote would depress growth.

    And by the way, isn’t it impressive that Minister Noonan totally ignores the Fiscal Council when it suggests bigger budget adjustments, but embraces it when it might be used to foster a stench around a “no” vote.

  127. @Jagdip Singh

    Suppose The Fiscal Council will have no option but to resign en masse. I’m reminded of a previous Fine Gael ‘Thundering Disgrace’ which resulted in a resignation.

  128. @ Michael Hennigan

    I’ve stuck to the actual words that you yourself have used in this thread.

    Interesting that your response has been a great deal of bluster and attempting to change the subject.

Comments are closed.