The long-mooted job subsidy plan appears to be about to happen, though as is often the case in Ireland, the public can only learn about this through leaked details from social partnership talks, rather than through the publication for discussion of detailed government proposals.
Speaking on RTE’s The Week in Politics (about 16.20 minutes in) Minister for Health, Mary Harney noted repeatedly that NAMA would take on good loans as well as bad loans and then said the following:
This is an important issue. From the good loans they will get cash to run on a break even basis on a day-to-day basis. The ESRI has done a simulation study and they have suggested that over ten to fifteen years this will break even as far as the taxpayer is concerned and that’s the reason as well to take the good loans to raise the cash.
Two aspects of this statement are worrying—the discussion of good loans and the comments about breaking even.
Today’s Irish Times reports the Minister for Finance as delivering comments along the following lines yesterday:
There was an ideological view that certain banks should be let fail and that bondholders and investors in that bank should take the hit. However, if Governments were to allow this happen, the result would be a ‘‘staggering loss of confidence in whole economic system of a country’’ and therefore ‘‘governments have to prevent banks failing and stabilise them’’, he said.
The implication of these comments is that no bondholder of an Irish bank should ever take a hit, no matter how badly the bank fails, as long as the Irish taxpayer is capable of bailing them out. In other words, Irish bank bonds should now be interpreted as having the same risk as Irish sovereign debt. The Minister also ruled out any further nationalisation, which in the absence of any kind of debt-for-equity swap (which I discussed here but would be ruled out by the Minister’s bond-holder comments) means that he is imposing a de facto lower limit on the value of shares in our major banks.
I reckon these comments place Minister Lenihan on the international cutting edge of moral hazard. Yes, the international reaction to the current crisis, with implicit safety nets made explicit and lots of new safety nets introduced, has made this a difficult contest to win. Maybe I’m being parochial here in singling out the Minister for this award, so perhaps our readers can highlight for me another government that deserves the award.
Incidentally, I would also argue that ideology is largely in the eye of the beholder. From my position, Minister Lenihan’s no-bondholder-left-behind approach appears far more ideological than the positions of those who argue that losses should be shared between the state and the various providers of risk capital.
Stimulus is a term being used these days by a wide range of people across the political divide. Unions, business groups, Fine Gael, Labour—everyone has a stimulus plan. Everyone, of course, apart from the poor old government. And, indeed, the vast majority of mainstream economists in the country. Since the term keeps popping up everywhere, I thought it might be useful to open a debate about it here, outlining why I have not joined the public clamour calling for stimulus.
This speech given by Fed Governor Elizabeth Duke and its accompanying charts are the most useful summary I have seen yet of the various interventions taken by the Federal Reserve and their effects on financial markets.