What can Ireland learn from Iceland?

Last week I spoke in Iceland (.pdf of slides) about the similarities and differences between our two countries.

Both countries had experienced booms caused by inflows of cheap credit, and both had experienced societal upheaval as a result of the inevitable crash. Iceland differed sharply from Ireland in its approach to resolving the crisis. Where we are currently floundering, praying for a deal on our banking debt from Brussels, Iceland is moving on, with a set of relatively clean bank balance sheets, a falling unemployment rate, an increase in economic output, and a national sense that the economy and the society is healing.

What can we learn from the Icelandic experience? Should we even compare ourselves to them? I think there are many lessons to learn, but you have to look a bit beyond the numbers.

Iceland is a tiny Island nation, with about 320,000 people in the country. Iceland has plentiful geothermal energy, an export base of aluminum and fish—especially mackerel—and a thriving tourism industry. More than 700,000 people visit Iceland each year. It is one of the most beautiful countries I have ever visited. Of course, Iceland has its own currency.

Like Ireland, Iceland was caught in a wave of speculation brought on by low interest rates following 9/11. A wave of privatizations and opening up of previously protected markets exposed Iceland to the vagaries of the international market. Iceland took full advantage.

Unlike Ireland, there actually wasn’t much of a speculative boom in housing. Icelanders speculated on their stock market and other financial assets. From 2001 to 2008, Iceland’s three biggest banks grew by a factor of 20, financed by cheap cash from foreign banks.

Dodgy practices, helped along by weak regulation, contributed to the boom. For example, the banks’ directors were using their banks in exactly the same way as Anglo Irish and Irish Nationwide were used: for personal gain and political patronage. An expose by WikiLeaks showed that huge loans were made just before the crash to the owners of one bank, Kaupthing, and to firms owned by them “with little or no collateral”.

Things were out of control.

The nearly 2000 page post-mortem report on the crisis noted sharply that “When it so happens that the biggest owners of a bank, who appoint members to the board of that same bank and exert for that reason strong influence within the bank, are, at the same time, among the bank’s biggest borrowers, questions arise as to whether the lending is done on a commercial basis or whether the borrower possibly benefits from being an owner and has easier access to more advantageous loan facilities than others. This is, in reality, a case of transfer of resources to the parties in question from other shareholders and possibly from creditors.”

One standard trick was to set up a holding company, which would buy shares on the open market. If the shares rose, the directors of the company paid themselves a handsome dividend. Once the value of the shares fell, the company folded, leaving the losses behind. Once investors got the smell of a downturn, the banks’ seemingly rock solid balance sheets turned to rubble overnight.

The Icelanders were warned. In 2001, Nobel Laureate Joseph Stiglitz wrote a report for the Icelandic government describing exactly what would happen if the increases in private sector lending facilitated by the banks was allowed to continue. Stiglitz wrote:

“the pace of expansion of credit for a credit institution is related to the likelihood that it will face problems in the future. Given these beliefs, very large changes in interest rates may be required to dampen the demand for credit; and these changes in interest rates themselves impose enormous stresses on the economy.”

Then he told them exactly how small open economies should respond to surges of capital in or out of their country by regulating banks heavily, restricting capital inflows and outflows and managing interest rates accordingly.

Icelanders are extremely polite, so Stiglitz was presumably thanked profusely for his report, which was binned about ten seconds after he delivered it. No one wants to hear from naysaying economists during the good times.

The boom continued, with cheap credit fueling a consumption bust that has left roads built to nowhere, ‘summer houses’ dotting the landscape, and large vanity project buildings upsetting the skyline of the tiny capital, Reykjavik.

The boom ended for Iceland because of the withdrawal of credit worldwide after the collapse of Lehman Brothers. Like Ireland, the weaknesses of the banking system were exposed almost immediately.

There the similarity ends. The Icelandic government could not guarantee the assets and liabilities of the banking system as we had—the banking system was just too large relative to the economy. The ratio of bank assets to national income was over 7. The banks and their assets had to be let go. This did not go down well. The economy imploded.

Well over 70% of the private businesses in Iceland became insolvent immediately, a wave of bankruptcies followed, the unemployment rate rose, the IMF was called in in November 2008 for a loan, capital controls were instituted, stopping many foreign creditors from getting their money back. Iceland’s economic crisis is considered to have destroyed wealth equivalent to seven times its national income.

Icelanders voted twice not to repay its foreign creditors in the Icesave controversy.

I think this is the key lesson Ireland can take from Iceland: in solidarity they removed the political parties associated with the boom and the bust, and in solidarity they prosecuted those responsible. This, combined with an increase in regulation of large banks, is what allows many Icelanders to hope that things will get better. This is not to say Iceland got away scott-free. At the end of the day, their personal and public debt levels are still very large, and emigration has returned to Iceland.

The worst is behind them.

Ireland has no such luck. We guaranteed the assets and liabilities of some of the worst banks in the history of modern banking in the name of EU banking stability, and received the largesse of the Troika as a result.

We must see those responsible for Ireland’s collapse pay for the damage they caused. We must see bankers and politicians held to account and punished. We didn’t all party.

We must balance our government’s spending and its taxation revenue, but unlike in Iceland, no one feels the pain is worth it in the end. The government cannot square this popular sense of injustice with the behavior of Ireland’s elite. There is no closure, as it were, to the crisis. Ours rumbles on while Iceland can move on. We can learn at least this much from Iceland.

(Published in the Irish Independent on the 17 of September, can’t find the link online yet.)

By Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

72 replies on “What can Ireland learn from Iceland?”

The sense of citizenship that the Icelandic displayed has put us to shame and their taking ownership of the problem and dealing with it while we play “not me,Boss!”

“We guaranteed the assets and liabilities of some of the worst banks in the history of modern banking in the name of EU banking stability…”

We did?

Would this scenario not also have applied to Ireland had the government failed to do so? And is it not the obvious explanation for it acting in the manner in which it did?

“Well over 70% of the private businesses in Iceland became insolvent immediately, a wave of bankruptcies followed, the unemployment rate rose, the IMF was called in in November 2008 for a loan, capital controls were instituted, stopping many foreign creditors from getting their money back. Iceland’s economic crisis is considered to have destroyed wealth equivalent to seven times its national income.”

Iceland tried to pass the following learning onto Portugal – Prosecute those who committed fraud.

Its beyond hope that the free state will implement that learning though it might be the most important.

Iceland’s citizenry exhibits a greater sense of solidarity; a much higher sense of moral fibre and postmetaphysical morality; within a democratic public sphere which is at a stage of development that Ireland can only aspire to.

Well done you sonns and dottirs!

bit off thread …

but after Minister Joan Burton slap on the belly button for .. er .. JUNIOR Minster Brian Hayes …

Michael Taft has a gentle tutorial for poor financially challenged Brian ….

“We must balance our government’s spending and its taxation revenue, but unlike in Iceland, no one feels the pain is worth it in the end. The government cannot square this popular sense of injustice with the behavior of Ireland’s elite. There is no closure, as it were, to the crisis. Ours rumbles on while Iceland can move on. ”

This captures Ireland position very well. It has pathos and pithy and reflects the limbo like land and feel of our Ireland’s position.

“Where we are currently floundering, praying for a deal on our banking debt from Brussels”.

A Brussels bank deal is no longer a desirable objective. It has now been reduced to that of a political objective to save the face of politicians.
A deal makes no sense for an Ireland still knee deep in crisis and in lethargy.
Whatever excuses Ireland had until now, once the ink is dry on whatever paltry deal is dragged out of Schaeuble, that’s it.
Far better to pull out now and reserve our position, and insist on the right to introduce capital controls.

Iceland—2012 Article IV Consultation Concluding Statement of the IMF Mission
March 2, 2012

Iceland has achieved much since the crisis and its economy is growing again. Nonetheless, considerable challenges remain. Tackling these will require steady policy implementation, increased coordination, and stronger policy frameworks.

Outlook and Risks

The outlook is for a moderate recovery. Over the medium-term, the drivers of growth will gradually shift away from domestic demand (notably investment) toward external demand (as exports increase). However, there are risks to this outlook, emanating from both external and domestic sources.

1. Iceland’s post-crisis recovery has taken hold. After two years of recession, growth turned positive in 2011, led by domestic demand. The labor market improved, although the unemployment rate remains high. Inflation picked up considerably, and remains a concern.

2. A moderate economic expansion is projected going forward. For 2012, growth is expected to be 2½ percent, led by investment and consumption (both of which should pick up from exceptionally low levels). The medium-term outlook is for moderate growth (2½-3 percent). The sources of growth will rebalance over time, away from investment (as projects are completed) and toward exports (as investment projects bear fruit). This should support job creation and facilitate a decline in unemployment. The output gap is expected to close in 2013. Headline inflation is projected to remain above the central bank’s target in 2012. Thereafter, inflation is projected to gradually come back down to target, reflecting tighter monetary policy.

Read on:
http://www.imf.org/external/np/ms/2012/030212.htm

Not to confine things to economics (I know it’s an economics blog! 😉 ) Icelandic anger was usefully channeled in interesting directions in the political sphere.

A referendum is being finally held on their proposed new constitution on October 20th (see http://www.kosning.is/thjodaratkvaedagreidslur2012/english/ for a list of the questions being asked).

The document produced by their constitutional convention forms a wide-ranging and fairly impressive overhaul of their existing constitution. It includes reforms to the electoral system, judicial and public appointments system, fundamental rights (e.g. freedom of information, media/protection of journalistic sources, ownership of natural resources), parliamentary reforms (election of the speaker, parliamentary alternatives, constructive vote of no confidence), their President’s ability to veto bills and send them to a referendum unsurprisingly remains intact, and some direct democracy provisions are introduced (where citizen petitions can introduce or veto legislation). And, unsurprisingly given the economic circumstances which triggered this constitutional process, regulatory oversight is strengthened. It proposes that legislation dealing with independent and regulatory state agencies and their operational setup can only be changed with a 2/3 parliamentary super-majority.

There’s quite a big contrast between the very wide-ranging and open-ended terms of their now completed constitutional convention process and ours which is seemingly soon to begin. I hope their process is something we can learn from however.

An English translation of their draft constitution can be found here: http://stjornarskrarfelagid.is/english/constitutional-bill/

Thorvaldur Gylfason (elected member of the constitutional council, Professor of Economics, and the person who received the highest number of votes to that council) has written a number of excellent articles on the draft constitution and the process by which it was arrived at. A short article here: http://voxeu.org/article/crisis-constitution-insights-iceland lists some of its highlights. A comprehensive 40 page article here: http://www.econstor.eu/bitstream/10419/57288/1/689491360.pdf gives a very readable account of the background and processes leading to the convention and final document and some of the rationale for its design choices (gives some interesting and often unflattering insights into Icelandic political culture).

As far as I could see there was little similarity between the Iceland banking crash and Ireland’s banking fiasco.

Icelandic banks expanded into the GB, Nederlands and a few smaller investments in other countries. Their subsidiaries outside of Iceland crashed. The Icelandic Gov’t (god bless their little cotton socks) refused to accept liability for Icelandic banking subsidiaries incorporated abroad. The position was we would not dream of usurping the authority of the Bank of England or the regulatory authority of any country. Attacks emanated immediately from the British and Nederlands Gov’ts meeting with no success in practical terms.

And so the Birmingham retail depositor became the responsibility of the British deposit insurance scheme.

We also have little resemblance to Italy or Greece where Gov’t borrowing is the major problem. We bear close resemblance to Spain where private banks behaved in a fashion familiar to us, with similar results. Portugal is a more complex hybrid of banks, mortgages and lack of competitiveness.

At the root of the Irish problem is the inability to discern the difference between what is a private company problem to be sorted out in the marketplace a la Schumpeter or Adam Smith or foisted onto the not so innocent Irish taxpayers.

Good article but there are a few things to consider, Iceland saw a bigger amplification in unemployment than Ireland did going from 2.3% to c. 8.5%+ we went from 4.3 to 14%+ and this is while Iceland was also showing years of record emmigration (such as in 2010) – meaning that like Ireland they are likely exporting some unemployment, but they are doing more of it.

Icelanders didn’t speculate on land, correct, but their banks certainly did – several of whom financed large Irish deals. They also did a good job of burning all investors – including IceSave depositors in the UK (that case is still not settled) something we never countenanced – we never even got bondholders up the chain never mind depositors.

Like Iceland we removed political parties – via a general election – but have not prosecuted anybody (a lack of actual laws to deal with this are still a problem). Perhaps some politicians would like to make reckless treatment or negligence of a fiduciary responsibilty a law – that would at least put a mechanism in place for the future; something sorely overlooked thus far.

We can rage about this absence of learning from our mistakes in the next boom bust cycle perhaps!

Icelanders voted twice not to repay its foreign creditors in the Icesave controversy.

Nope.

They voted to not accept the terms of the Icesave Bill as drafted by the democratically elected Icelandic parliament

The terms of repayment – instead of being set by the Icelanders themselves – will now be set by the EFTA Court.

The oral hearings are tomorrow.

The new reform government, voted in to clean up the disaster of The Independence Party, approved the Icesave bill – twice.

The President triggered the referendums by refusing to sign it – twice.

This is the same president who likened himself to a successful boss of a private equity firm in 2005:
http://www.telegraph.co.uk/finance/2926498/The-icemen-cometh.html

And had ties to the collapsed Baugur group:
http://www.icelandreview.com/icelandreview/daily_news/?cat_id=16567&ew_0_a_id=142191

This bit of Iceland’s story is still being written.

FYI

IMF Survey: Global House Prices Still Showing Down Trend U.S. house prices have started to pick up but globally prices are still on a down trend, according to IMF research. Price trends vary widely between countries, with Ireland, Greece, Portugal, and Spain seeing the biggest falls in the past year and Brazil and Germany, substantial increases.

http://www.imf.org/external/pubs/ft/survey/so/2012/res091712a

Does anyone else think it remarkable that with much wider acceptance of the bear case for EZ and global economies than was the case a year or two ago, the IFAC and IMF reports emphasising that and the implications for Irish debt sustainability, glacial “reform” and press reports Germany doesn’t give a hoot about Ireland wanting to renegotiate it’s bank debts (not to mention press reports Noonan is not even asking for any of it to be written off or paid by someone else) – that there seems to be such sanguine background music to all this?

Is it just that it is now assumed there will be an official Hoover of one sort or another there to provide a bid and stop bond yields reflecting the economic reality?

@ All

In short, comparing one financial disaster with another adds little to the sum of human knowledge about how to avoid them in the first place.

The Irish Gov’t did not have the foggiest notion of what it was getting itself into when it back stopped the Irish banks. The Gov’t put out rumours to the Civil and Public servants that if the banks were allowed to go into receivership their precious pensions and wages would go poof because the Gov’t would not be able to borrow abroad. To businesses of all sizes the word was existing loans would be pulled and the new loan market would dry up.

So the long standing candy shop on Kildare Street by now accustomed to doling out the fruits of EU membership and being quite incapable of facing up to reality decided to switch the candy flow to the private banks. Fantasies of propping up property values and avoiding the downward spiral were also dancing in minds already under the influence of mind altering substances.

Still no end in sight,

@Stephen

Interesting post, thanks.

I remember at the beginning of the crisis Iceland was making noises concerning apply for Euro membership. I also remember this was used in 2010 as “evidence” that we were right to stay in the Euro.

Do you know where the Icelanders are at the moment concerning Euro membership?

My guess is the experience of Ireland and others has deminished their enthusiasm…

@docm

“In short, comparing one financial disaster with another adds little to the sum of human knowledge about how to avoid them in the first place.”

Why?

And even if you are completely right, why not compare and contrast approaches to addressing financial crises when they have occurred?

@DOCM

“In short, comparing one financial disaster with another adds little to the sum of human knowledge about how to avoid them in the first place.”

An anti-intellectual statement worthy of the Edward Lear Nonsensical Award for September. Take a bow!

@bazza
Iceland’s application of membership of the European Union will be high on the agenda of the Irish Presidency in first half of next year. As will a few spats on mackeral!

@grumpy
Must all be on the blue soma pill – how else to explain the supine state of the Citizenry thus far – and the apparent supine state of the ‘no writedown’ stance of Minister Noonan.

@Mickey Hickey
Still no end in sight.

There is never going to be a debt write down while remaining in the EZ. There was never going to be a burning of senior bond holders while staying in the EZ.
The best that can be achieved is a NPV reduction via a deal in debt service cost and extension of maturities plus an accommodative monetary policy that allows the debt to be inflated away.
If you want debt write down you have to default unilaterally, leave the EZ , print, impose K controls and balance the books stat. Of couse that screws those dependant on the state and on fixed incomes.

Learning lessons in slow motion over five years?

Not being in the EU can have advantages by ignoring quota agreements when fish move towards your area because of climate change; not being in the EMU at a time of calamity can have its advantages too.

Both countries were massively misgoverned. At least in Ireland, a long serving prime minister did not take charge of the central bank.

The president switched from being a cheerleader of new ‘Vikings’ to telling the UK and the Netherlands where to get off. A court hearing on the Icesave issue opens in Luxembourg today.

Once the liquidation of Landsbanki is complete, the exposure of Iceland may be significantly reduced.

The two economies have little in common. Ireland is an entrepot country dependent on foreign firms for most of its trade.

Lessons could be learnt from a number of small countries but there isn’t an appetite for significant reform in Ireland.

The IMF forecasts that in 2015, net Finnish debt (public debt offset by for example the cash value of pension funds) will be -49% of GDP; net Swedish debt will be -21% of GDP and Danish debt will be +11.5% of GDP.

By dwelling on Iceland, we can futilely wonder what could have had a better past outturn; in contrast, focusing on the real knowledge economies, may reveal too many inconvenient truths to handle.

We guaranteed the assets and liabilities of some of the worst banks in the history of modern banking in the name of EU banking stability, and received the largesse of the Troika as a result.

This is a conflation of two events over a period of more than 2 years.

The Sept 29/30 2008 guarantee decision was taken unilaterally to save Anglo Irish Bank. Soon after the public announcement, guess what was being commonly discussed at the highest levels in two buildings on St Stephen’s Green? Anglo’s urgent need for a €4.5bn loan/deposit.

We must see those responsible for Ireland’s collapse pay for the damage they caused. We must see bankers and politicians held to account and punished. We didn’t all party.

A noble sentiment but a rewriting of history, methinks.

We didn’t all party: the average industrial wage rose by 60% in the decade to 2007 while the basic salary of TDs jumped 119% and so on.

The boosters held the public megaphone and some in the great institutions of the state and in the private sector that was gaining from the bubble (this excludes the internationally tradeable goods and services sectors) presumably did not believe that a hospital bookkeeper had managed to invent the free lunch but they kept their heads down and went with the flow – – It usually pays dividends as black swans are rare.

The facts are that there was a limited audience for dissent. It is difficult to resist getting involved in a period of hysteria but by wheeling out the tumbrils for some, it removes responsibility from the large number who did party.

It feeds the market for victimhood and why change the status quo when the disaster can be blamed on a small number at home and mean folk overseas?

As for punishment, isn’t the current official position that some accounting manipulation is bad while extensive manipulation is okay because the country may need to facilitate it?

@ grumpy

Not very well put, I must admit. I was referring to the various earlier posts which demonstrated that the two cases were so different that little can be gained from attempting to compare them.

The overall presentation by MH above could hardly be improved upon. The only point of difference that I would have is that in giving the guarantee, while Anglo-Irish was the immediate problem, the fear of the collapse of the entire banking industry was the main motivation.

I think that TMD is also correct, although I would hope that in the medium term, when the Spanish situation has been clarified, something further can be done. Indeed, press comment this morning bear him out with the talk about a long-term bond.

It seems to me that the debate in Ireland is now shifting to where it really belongs i.e. to what must we do ourselves. This is largely because the various “what others must do” scenarios, that are rooted in a mistaken paradigm of how the EU and the EA work, are being shown to lead nowhere.

The Examiner has an editorial today on more brave decisions to screw future workers.

The Minister for the Status Quo must be pleased that his model is being bravely adopted by negotiators where on each side of the table, the same self interest exists in resisting current change.

Balancing the books – Self-interest becomes dishonesty

http://www.irishexaminer.com/opinion/editorial/balancing-the-books–self-interest-becomes-dishonesty-207898.html

@DOCM: “This is largely because the various “what others must do” scenarios, that are rooted in a mistaken paradigm of how the EU and the EA work, are being shown to lead nowhere.”

Going ‘nowhere’ is all the rage. You do not have to start somewhere nor go anywhere in order to arrive at nowhere. Its mind-bending stuff.

@SK: “We must balance our government’s spending and its taxation revenue, …”

Indeed we should but ‘decisions have consequences’ and these would be v-bad. On the other hand if we leave well-enough alone things will be even worse. Lets stick with the present v-bad! Even better, lets go forward into our past. Ah, that’s much better!

“The government cannot square this popular sense of injustice with the behavior of Ireland’s elite.”

There is NO popular sense of injustice -yet. I do not believe one will even emerge. Maybe it will.

“There is no closure, as it were, to the crisis. Ours rumbles on … …”

The assiduous application of Skilled Incompetence to ensure an even more heroic Successful Failure. There is no constitutional check that the Oireachteas can exercise over the Government. Most deputies are semi-anaesthesized zombies, the rest are the Walking Dead. We will have to get Blind Biddy to summon the Irish Grandmothers onto our streets. Irate grannies can be a tad ‘persuasive’.

“We can learn at least this much from Iceland.” Eh!?

‘We’ – whomever they are (its not I!) will not learn a blessed new thing. Isn’t that the actual problem?

Nice bit of impirical evidence in the IT this morning – it costs an arm, a leg and God knows what else to subsist in Ireland. Place your bets for the first official mouthpiece to diss this report.

What can Ireland learn from the Irish experience ?
Because the next crash is going to be worse.

And it look likes that line from Born Slippy

“Going back to Romford ….and remembering nothing”

@Brian Woods snr.

Text from Blind Biddy: Message received; understood. Over.

@DOCM

Award withdrawn.

seafoid

You old raver, can’t imagine many here will get that reference? lol

Stephen Kinsella – I doubt the usual suspects spouting the tired neo-classical rubbish on IE will be too interested (being assiduously determined to learn precisely nothing from the crisis), but maybe there’s some hope for you?

Steve Keen’s recent presentations in New Zealand (getting serious attention from the NZ treasury dept. now) bring us up to date with the excellent work he’s been doing. Of course, being of the Post Keynesian persuasion & correctly understanding both macro & the monetary system gets him on the right track from the off.

Long pieces (1hr 40 & 63mins) but totally worth watching & a must see if you want to know what Keen’s about –

Keen on Schumpeter, Minsky & Aggregate Demand, parts 1 & 2

http://www.youtube.com/watch?feature=endscreen&NR=1&v=3g_eFf-n04o

http://www.youtube.com/watch?NR=1&feature=endscreen&v=KQ9aNMMNTP8

Towards the end of the 2nd part Keen offers his solutions to the present ongoing (& getting worse) mess.

For those who don’t know who Prof Steve Keen is, he is one of the very economists who saw the economic crisis coming, said so, & importantly had a solid (accounting) methodology to explain why.

@Mike Hall,
@DOD

Thanks for recommending and referencing the Prophet.

Steve Keen actually took part in a debate on the Mind Your Business programme (RTE 1) on 15 September, where he mentioned an uncannily prescient article on the Euro written by Wynne Godley as far back as 1992.

http://www.debtdeflation.com/blogs/2012/09/15/wynne-godley-on-the-euro-in-1992/

http://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that

See also SK’s recent article ‘Leaving the Hotel Euro’:

http://www.businessspectator.com.au/bs.nsf/Article/European-debt-crisis-euro-markets-IMF-bonds-pd20120903-XRPUM?OpenDocument&emcontent_spectators

Tuesday, September 18, 2012
Michael Hudson on How Finance Capital Leads to Debt Servitude

This edited transcript is expanded from a live phone interview with Michael Hudson by Dimitris Yannopoulos for Athens News. It summarizes some of the major themes from Hudson’s new book, The Bubble and Beyond: Fictitious Capital, Debt Deflation and Global Crisis, which is available on Amazon.

Q: How has the financial system evolved into the form of economic servitude that you call “debt peonage” in your book, implying a negation of democracy as well as free-market capitalism as classically understood?

Read more at http://www.nakedcapitalism.com/2012/09/michael-hudson-on-how-finance-capital-leads-to-debt-servitude.html#UeAh7RX9qfYQGUiR.99

@Stephen Kinsella

Humblly suggest you give this Hudson piece to your 4th year students and provide them with a valuable morsel of real education.

Export dependent companies in Germany are hurting due to softening export markets and the rebound of the Euro which softened from $1.60US to $1.20US and is now rebounding through $1.30US.

As in Ireland business in Germany are now lobbying Gov’t to weaken the Euro. The way to do that is by turning up the heat on the PIIGS and that is exactly the game Frau Merkel is playing.

It is now up to France to lead the EZ since a EZ that floats all our boats is no longer congruent with German business interests. Germany has to be issued an ultimatum that they are either with us or against us. Make up your mind to be a team player or withdraw voluntarily before we have to kick you out.

i do not need to point out that Germany on its own or with Austria, Luxembourg, Finland, Nederlands would have an exchange rate less favourable than they would have in the EZ. Yes the rest of the EZ does have bargaining power.

@ DO’D: “The Bubble and Beyond: Fictitious Capital, Debt Deflation and Global Crisis, which is available on Amazon.”

Am reading. It seems to be a print-as-you-go edition (many typos). Scary stuff none-the-less. Very non-mainstream economics. It would go down like a depleted-Uranium brick.

Veblen and Soddy have been ‘there’ before Hudson. Which makes you wonder real hard about human memory and lesson learning abilities. Guess most folk only want to be entertained.

Netherlands
“Europe’s pain in the neck” falls into line
18 September 2012 De Volkskrant Amsterdam

Winner of the Dutch elections, centre-right prime minister Mark Rutte will be forced to form a coalition with Labour. He will therefore have to temper his criticism of the EU, to the great relief of Brussels … and Berlin.

http://www.presseurop.eu/en/content/article/2714261-europe-s-pain-neck-falls-line
I hope they change the finance minister – had enough of the last lad De Jager!

@ Brian Woods Snr

“Veblen and Soddy have been ‘there’ before Hudson. Which makes you wonder real hard about human memory and lesson learning abilities. Guess most folk only want to be entertained.”

Add Georgescu-Roegen to Veblen and Soddy.

As to Hudson, I can’t find much evidence of his being aware that the ultimate purpose of economic activity is to give entropy a helping hand. Besides, he seems to be something of a monocausalist – he blames big finance for EVERYTHING: shades of Treitschke, die Banken sind unser Unglueck.

That excessive government spending might also be part of the problem is deemed heresy and makes him sound like some embarrassing leftist equivalent of Ayn Rand who mortifies his own side with his over-the-top pronunciamentos.

As to Greece, his main argument sounds self-contradictory to me:

Greece can do whatever it wants with regard to which debts get paid or are written down or written off altogether. It can re-denominate debts in its own currency and then devalue. Or it can simply repudiate the debt as being unpayably high.

The irony is that if that is the case, it makes sense for Greece to continue borrowing until the bitter end, since the ghastly austerity it is now undergoing is a soft option compared to what the country will face once its creditors turn off the tap. Why should Greece repudiate its debt today when it can with equal ease repudiate an even greater debt tomorrow or next year?

There are good reasons for Greece’s declaring itself bankrupt straight away but to imply (as Hudson does, unless I’ve misunderstood him) that the consequences will be relatively painless is to strain credulity.

CG

@seafoid: thanks.

@Brian Woods Snr

He continues to make a hell of a lot of sense on the financialization of humanity. Will buy this book. This interview alone is some reading – and Ireland is a perfect example – some €100 billion lesson for the serfs.

Back for a sticky and sparky once off post brought here by listening to Stephen Kinsella extolling the virtues of a 40 yr bond to replace the PN note fiasco on the radio RTE news.

He ought to be condemning the switch to a 40 yr bond as a sell out of Irish taxpayers who’ll now be forced by international law to make good on this bond as it transfuses by way of debt reparations to German banks the assets of Irish taxpayers for decades to come.

But no, to him there’s great merit in the detail that could bring down those repayments to €500 ml instead of €3 bn annually. Who’s he kidding:-)

A better analysis of the Iceland meltdown is given by Roger Boyes ‘Meltdown Iceland’, Roger Boyes’s book, a good read. We await the banking inquiry to reveal similar details, but I wouldn’t bet the PAC will begin this journey too soon. Better wait until all is shredded and doesn’t matter anymore.

http://en.wikipedia.org/wiki/%C3%93lafur_Ragnar_Gr%C3%ADmssonSignificantly, Stephen doesn’t note the different contributions made by the Icelandic political establishment to the crisis compared to our own defeated and incompetent response.

http://en.wikipedia.org/wiki/%C3%93lafur_Ragnar_Gr%C3%ADmssonÓlafur Ragnar Grímsson played a stellar role helped by his academic background in economics and his adamant refusal not to burn taxpayers at the expense of bondholders.

The failure of our negotiations at ECB level nourished by the views of Stephen on the merits of 40yr bond that will cost this country far more than the cost of the current PN arrangements, is only balanced by the inevitable implosion catastrophic arrangements like these will bring to the Irish economy as it goes backward via its debt reparations.

It will not take long for other PIIGS under similar arrangements to disappear into the black hole of the doomed euro. It doesn’t serve Ireland well that Polyanna economists and politicians capitulate to demands leading to accentuation of emigration and business closures across Ireland.

If you really think the 40 yr junk Bond is a good deal for Ireland, good luck and keep sleeping comfortably in Tir Na N’Óg 🙂

If you want to read more like this have a read of the Three Stooges window washer project here as they attempt to cure the tooth ache of the euro and Irish debt relief.

http://wp.me/pBbF3-l0

@Sarah Carey

Loved that blue skirt with Miriam on Sunday morning. Hi to Daddy!

Spose you could certainly improve on Lucinda (-;

Lucinda on TV3 right now – such entertainment! & Dinny O’B on the agenda again … no correlation intended.

@ Sarah Carey

Thank you for your kind words.

This is between ourselves – STRICTLY CONFIDENTIAL AND HUSH-HUSH – but I have of late,—but wherefore I know not,—lost all my mirth, forgone all custom of exercises; and indeed, it goes so heavily with my disposition that this goodly frame, the earth, seems to me a sterile promontory; this most excellent canopy, the air, look you, this brave o’erhanging firmament, this majestical roof fretted with golden fire,—why, it appears no other thing to me than a foul and pestilent congregation of vapours…

Ekshelly I’m only joking. But I’ve been living in Athens on a one-year misery tourism scheme and BELIEVE ME the Greeks certainly know how to take the fun out of misery! After three years of austerity, Schadenfreude (‘I told you so’) somehow loses its charm. One can only wallow so long in the suffering of others before their plight becomes contagious.

And now back to my κομπολόι (worry beads) …

@ Carolus: Good to give N G-R a mention. Not easy reading though.

Another chap, Reiner Kummell has recently popped up with -‘The Second Law of Economics: Energy, Entropy and the Origins of Wealth’. Bit fussy and lightweight but at least its a somewhat different slant (wouldn’t recommend).

However, Ayres and Warr – ‘The Economic Growth Engine: How Energy and Work Drive Material Prosperity’ is a much more serious text.

It would be interesting if all the academic econs would publish their teaching syllabi. Give us a view of what they are not teaching their undergrads. Remarkable silence all around about the current mess.

A Debt Jubille (aka: an Asteroid Strike) is the only real solution for indebted western economies. Else their populations will slowly drift toward ‘Grapes of Wrath’ economies. They will have little money to spend becaise their incomes are so low, or have little to spend because their incomes are being looted to pay debt. What’s the difference? The Poverty of Freedom or the Poverty of Servitude?

“The Icelandic government could not guarantee the assets and liabilities of the banking system as we had—the banking system was just too large relative to the economy. The ratio of bank assets to national income was over 7. The banks and their assets had to be let go.”

Alan Dukes made the very same point a good while ago on Marian Finucanes Radio show over a year ago.

I believe at the time of the guarantee our GDP was about 170 billion and the bank assets we were asked to guarantee was about 400 billion. So about 2.5 times.

So this implies that the level at which a country can afford to bail out the banking system is if their assets are some where between 2.5 and 7 times National income. Is it 3? 4 ? 5?

Its only when you ask the question like that you realise how ridiculous the question is. Neither country could afford to do it. The fact Iceland couldnt afford it by many multiples is completely irrelevant buts its a clever argument if you are the chairman of the worst offending bank.
It also implies that if you can possibly afford to save your banking system you should, regardless of the side effects.

I would contend that the level at which a country can guarantee their banking system is well below 2.5 times national income and that the level at which it should do so is close to, of not zero (what about the rules of Capitalism, what about moral hazzard?).

Remember the words of Eamonn Gilmore the morning that his party rejected the Bank Guarantee but were outvoted in the Dail.
“If this gets called on the country is sunk”

When David McWilliams came up with the idea of guaranteeing the whole Banking systems Assets and Liabilities his justification was that he did not want to see happen in Ireland what happened in Russia after their default in the 90’s. He had witnessed this first hand. If his bright mind hadn’t have come up with that idea and had he not have been so eloquent in arguing for it the government would have had very few/ no other routes and would have had no choice but to allow the banks fail despite pressure from the ECB to avoid it at all costs. McWilliams was pivotal in convincing the leader of the green party to agree to the plan, and it probably could not have happened without Gormleys ok. McWilliams claimed later that it was merely a bluff and that the guarantee should be rescinded. But rescinding a guarantee of a sovereign is not an easy thing to do even if there were time limits. Because the resulting fallout from rescinding the guarantee would be immediate and catastrophic at any time. The Labour party certainly didn’t think so.
They used the fact that a legal government guarantee had been given to ease complaints from the public that they had completely changed tac and agreed to uphold the guarantee and continue to pay bondholders after the election.
Gilmore “Labours way or Frankfurts way” speech was a rouse for the masses on the eve of an election that might have resulted in a FG Majority. Joan Burton had already confirmed in the lead up to the election that the promise of a soverign government to give the guarantee to the banks had to be kept even if labour disagreed at the time it was given. It is a point Burton has made many times since.

McWilliams biggest mistake was believing that what happened in Russia was avoidable if only the government had stood behind their banks.
Wrong, the fallout and subsequent cleansing was a capitalistic cure that should have been allowed to happen. The greatest service McWilliams could have done for Ireland in the lead up to the Guarantee would have been to hold his tongue (We know from Mcwilliams own articles that most senior public servants were against it). A difficult thing to do when you are expected to write two columns a week, ill grant you. Unfortunately McWilliams idea was a candle in the dark for Lenihan, Cowan and Fitzpatrick, the only answer to avoid their immediate Armageddons but unfortunately insure ours.

For people who think the actions of one man could not be so important its important to remember our Icelandic friends.
Against the wishes of the government on both occasions the president of Iceland ensured that the Icesave repayments were put to the people. He knew they would reject it. His individual courage in forcing that allowed them escape a huge extra overhang of debt at the stroke of a pen.

Mcwilliams was not a villain in the Irish tale more a misguided optimist whose bright but misguided ideas were used to seal our fate. Our children will be counting the costs of deciding to guarantee the investors in European banks who should have accepted their losses.

Perhaps the ECB will recognize what a huge hit Ireland took for the team and give us a deal that allows us to avoid default. They should but I am not so optimistic.

However the point remains that the losses should have been absorbed by investors who made bad bets. Thats what capitalism is. By arguing for intervention in order to save the system. To socialise the losses of the very wealthy and encourage them to grow bubbles again is moral hazzard of the most extreme kind. It gives huge credence to those who believe that the system we actually have is not capitalism at all but a a form of corporate capitalism where the decks are stacked in favor of the 1%.
Ironicly in Ireland we benifit from this system more than most countries so there are many who have an interest is seeing it continues.

@eamonn moran

The turning point was in 1980, when the Reagan Administration was elected in the United States, right after Margaret Thatcher led Britain’s Conservatives into office and began the big privatization sell-offs at enormous, unprecedented commissions that made the financial sector richer than ever before. Drexel Burnham led the practice of turning the stock market into a vehicle for banks to emulate their real estate loan departments by creating credit for corporate raiders to take over companies, load them down with debt and extract profits to pay out as interest. This was done by downsizing the labor force, shifting over to non-union labor, and where possible, renegotiating employee pensions downward or simply grabbing the pension funds or Employee Stock Ownership Plans (ESOPs) to pay creditors. So corporate finance became destructive instead of productive.
This sort of banking has concentrated wealth, and used it to privatize and buy control of governments and their regulatory agencies. Banks have lobbied to keep interest tax-deductible so as to favor corporate financing by issuing bonds and taking out loans instead of issuing stocks. Bank lobbyists back the political campaigns of lawmakers committed to deregulating the banking industry and its major clients (real estate, natural resources and monopolies). It even has taken over the Justice Department and the courts, so that financial fraud in America has been decriminalized, as there is no regulation of outright criminal behavior. This is especially true of the largest banks such as Citibank and Bank of America where the fraud tends to be concentrated, as my colleague William Black at the University of Missouri at Kansas City has shown.
(michael Hudson)

The financial system has ‘captured’ governments and through these govs passes on its f*ck ups to the Citizenry in the Lifeworld. If citizens in the Lifeworld don’t fight back then the financialization of humanity through casino capitalism will continue unabated. [cf link above]

further, the fact that the question is asked indicates how deeply this socialization of financialization has penetrated the lifeworld. Hence the usefulness of the metaphor of the Matrix – blue pill and serfhood or red pill and fight back.

@eamonn moran

For people who think the actions of one man could not be so important its important to remember our Icelandic friends.
Against the wishes of the government on both occasions the president of Iceland ensured that the Icesave repayments were put to the people. He knew they would reject it. His individual courage in forcing that allowed them escape a huge extra overhang of debt at the stroke of a pen.

I said it earlier… and I’ll say it again

Nope.

http://www.irisheconomy.ie/index.php/2012/09/17/what-can-ireland-learn-from-iceland/#comment-330357

He denied the democratically elected parliament the freedom to set the terms themselves and now the terms will be decided by the EFTA Court.

And he has form.

@ DoD

Great stuff by John Kay in the FT today

“The establishment of complex financial conglomerates, whose assets and liabilities were mainly the liabilities and assets of other financial conglomerates, created a structure in which minor disruptions were likely to have large and unpredictable consequences throughout the financial system. This issue cannot be addressed by establishing committees to watch it happen. To respond by public insurance of the structure is dangerous, not just because it imposes obligations on taxpayers but because it largely relieves private actors of the obligation to monitor their own counter-party risks.
Alan Greenspan expressed puzzlement that shareholders and managers of banks had not controlled risk more effectively. But shareholders who provide less than 5 per cent of the capital of a business are not equity participants, but owners of a call option: in turn, corporate executives with bonuses and remuneration plans hold options on these options. How can we expect stability when volatility increases the value of the instruments owned by the people who make or influence all important decisions?

The true equity participants in highly geared ventures are the owners of debt who are now reassured that the businesses in which they invest are “too big to fail”. We need instead smaller, simpler, financial institutions, which specialise in particular lines of provision of financial services to the non-financial economy, rather than trading with each other.”

@seafóid

Neat. I still don;t see any moves back to servicing the ‘real’ economy. It is business as usual for Citi, Goldman, Deutsche et al they have lost expertise in the real economy …. we are heading for the next bust …

@Carolus

Athens. My, my. I was there once. It’s very big. And crowded. And hot.

Austerity gets tiring and boring. But I think we have to move to a new level. We have to figure out how to live well and not merely eke out an existence. For instance – I’m thinking of starting a 25’s/110’s evening. But I’ve forgotten the rules.
When I’m up and running and my card circle is the new social whirl and restaurants are long forgotten, then the fun will be back and who knows, it might even be (slightly) better.

@Mr. Kinsella
The Icelandic banks were in trouble long before Ledermans collapsed, much like the Irish ones. Don’t give discredited memes the support they don’t deserve.

@DOCM
You’re right, we can learn nothing by comparison and nothing from history.

I have some land I’d like to sell you, it’s a sure thing, Ryanair are going to fly there next year.

@eamon moran
Not to kick a horse when he’s down, but…
“So this implies that the level at which a country can afford to bail out the banking system is if their assets are some where between 2.5 and 7 times National income. Is it 3? 4 ? 5?”
You are supposing that this calculation was made in Ireland like it was in Iceland. It don’t believe it was. I believe that the grubbernment was as surprised as everyone else why Davys and George Lee came up with their 500bn/400bn figures of what the state had just guaranteed. By then it was far, far too late…

@ Hogan
Fairly sure that 400billion figure was knocking around the day of the Guarantee. It was the value of all he assets in the 6 Irish banks covered.

Are you asking if they made an attempt to value the assets in the Irish banking system before they guaranteed it? Yes they did. It would have been a very easy figure to obtain. The government paid 3 million for a report (which advised against a blanket guarantee) from Merill lynch that would have outlined it. But in McWilliams eyes the value of the assets wasn’t very important. He just wanted to use the guarantee to see huge capital inflows come in to Ireland. That did happen in the short term but he underestimated the side effects. He never intended to pay out anyway. It was a bluff.

@eamonn moran

Ahhhhhhhhh….. but there is the government lie writ large there!

They were shopping around for the answer that they wanted.

They already knew the course of action they wanted to take – they just had to find suitable cover.

How sad is it though that they had to stoop so low?

If you were Minister of Finance which would you rather be using as your defence for choosing your course of action – 1) We paid €3 million to these international banking consultants and they advised NO or 2) I went for tea and garlic at midnight with this guy I know and he advised YES.

McWilliams is a convenient government scapegoat.

Eamonn is right that the amount of the banking liability was known in advance as shown in this report by ML outlining the banking options to the government four days before the guarantee. Note that a guarantee is described as “best” and “most impactful” but every option is qualified with potential risks. Honohan’s post mortem was that a guarantee was necessary but that the scope was too broad.

Wondering about the best response to a crisis is of less use than wondering how the crisis was allowed to be created over a 10 year period. Which heart surgery is best for a 20-stone smoker? It’s the wrong question.

Kinsella’s analysis of the relative hardship suffered in Ireland and Iceland does not mention that savings, salaries and welfare payments were halved by devaluation. By contrast in Ireland every major welfare payment and public pension is above the level it was at bubble peak in 2007 (see: Seamus Coffey’s blog). Hourly wages have not fallen since 2008 (see CSO). Not a cent has been lost by any Irish saver.

The claim that the “The worst is behind them” is ambitious given that if the Icesave judgement does not go their way, they will pay as much per capita as Ireland in banking costs. But this is not all. Last week the European Parliament voted to empower the commission to ban fish imports from countries that engage in unsustainable overfishing. This is aimed squarely at Iceland.
http://www.europarl.europa.eu/news/en/pressroom/content/20120907IPR50823/html/Stop-overfishing-of-mackerel-MEPs-back-sanctions-against-third-countries

Iceland is a great country and so is Ireland and both will emerge stronger and wiser but the idea that Iceland got off easy using some stroke does not stand up.

re- Eamon Moran
‘For people who think the actions of one man could not be so important its important to remember our Icelandic friends.
Against the wishes of the government on both occasions the president of Iceland ensured that the Icesave repayments were put to the people’

McWilliams wasn’t president, though. Nor did Lenihan ever strike me as the type of man so shakey & unsure as to call in an outsider in a panic for advice.
A foil, almost certainly.
The loose lips of Gormley & co. have since revealed that all week they DoF was in communiqué with various European ministers of finance, and the decision was taken on the evening following Lenihan taking a call from Trichet – and Eamon Ryan has twice stated that all these parties knew about the guarantee specifically, as did Gormley. A few FFers have corroborated this.
(several of these conversations are on youtube, VB show etc. – not my own fabrications)
This, belated response for the sake of correction & posterity.

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