Last Friday, European bond markets wobbled again as investors – albeit in a thin market – got the fear.
The reason apparently was, again, Greece, where reports of soaring unemployment and complete economic stagnation are fuelling worries that the Greeks will have to renegotiate their debts. Bondholders will lose no matter what.
But they should lose.
They took a gamble and it didn’t work.
End of story.
What part of capitalism do they not understand?
The same should happen here with the banks and the bank creditors, otherwise – as we have argued in this column time and again – the people of Ireland will pay a terrible price to remain ‘‘credible’’.
I put credible in inverted commas because increasingly the word, as deployed by the government and financial market players, is actually the opposite of credible: it is incredible.
Think about what is happening in Ireland. We apparently have money to bail out bust banks – even when other banks are closing down here and getting out of their own volition – but not to build hospitals or invest in education.
This perversion is being hailed as credible by the government.
But it is not credible, it is stupid. It is monumentally stupid. In fact it is not only stupid, it is economic vandalism.
This very vandalism has resulted in us getting into a bizarre and ultimately incredible cycle.
Think about it.
The more the government says that the course of action it is on is credible, the less the markets appear to believe them.
The less the markets believe, the higher the spread between Irish bonds and German bonds.
The higher the interest premium (the risk of default), the more the government feels it has to do to impress the markets.
But the more the government talks about cutting back essential services, while at the same time being cavalier with the amounts it is prepared to put into the banks, the greater the risk here.
The reason the risk rises is that the more we cut back or tax, the more the growth rate slows.
So we are in an intellectual, as well as financial, cul-de-sac.
Instead of admitting this, the government is in denial.
Worse, it is employing quack economics to justify everything.
The quack economics being deployed is a type of fetish in certain Irish economic circles.
It is called Ricardian equivalence.
Before you nod off, let me explain the theory, which is being used to rationalise what is going on in Ireland now.
In the early 1990s,when I worked in the Central Bank, many economists there became fixated by the idea that, when a government reduced spending, the economy would actually grow, because the average person was so clever that they realised their taxes would fall in future and thus reacted to a cut in government spending by increasing their own spending.
Equally, the corollary held: that if the government started spending, the average person, anticipating that his taxes would increase in the future, would stop spending.
Thus, went the theory, increased government spending would have no overall impact on the growth rate.
The positive reaction to the 1987 budget cuts was cited as evidence for the truth of this theory, and there had been something similar observed in Denmark in the mid-1980s.
It perplexed me that clever people would believe such claptrap, when it was obvious that the devaluation in 1986 that preceded the budget reductions and the massive monetary stimulus coming from interest rates almost halving between 1987 and 1991 was what drove the economy.
The monetary expansion more than offset the fiscal contraction, and the outcome had nothing to do with people calculating that taxes would fall in the future and ‘‘bringing forward’’ spending because they felt richer.
The idea seemed tome so silly as to merit little more than a passing glance.
I mean, if people reacted like this, why did we splurge when Bertie Ahern and Brian Cowen ramped up government spending in the last decade?
If Ricardian equivalence held, we should have stopped spending from 2001 to 2007 because the government was spending like a drunken sailor.
But we didn’t: in fact we did the opposite, we spent even more than the government.
The same thing happened in the US.
When George Bush blew the American budget apart, the American public didn’t react by increasing saving.
They did precisely the opposite. Similarly now, when the Irish government is cutting back, we the people are not increasing spending, as Ricardian equivalence suggests we should; we are saving like never before.
Put simply, the idea that you can cut your way to growth using some elegant academic construct is nonsense. Historically, wherever government spending was cut and the economy took off, it was always offset by a massive loosening of monetary policy.
Think about Reagan and Thatcher: their reductions in government spending were accompanied by the biggest monetary expansion the US and Britain had experienced in peacetime.
That’s what drove the spending patterns in both countries. In Ireland, the case was the same.
The fact that the successful fiscal adjustment of the late 1980s and early 1990s was bookended by two large devaluations – one in 1987 and one in 1993 – is also carefully ignored.
Maybe this is because admitting that devaluations worked then to get us out of a hole might prompt people to ask questions about the appropriateness of the current monetary policy – and to do this is heresy.
In spite of all evidence to the contrary, there seems to be a residual belief in certain economic circles in Ireland in the idea of Ricardian equivalence.
As a result, there are people in powerful positions who contend that we will respond to more and more cuts by spending, and thus the economy will grow.
Clearly, the bond market doesn’t believe this – and what is dreadfully delusional is that the people who believe this silliness are trying to appeal to the bond market to believe it too.
We need to realise that the only thing that counts is growth.
To achieve growth, we have to do something radical. Clearly, this would be risky, but it has worked before all over the world. Is it better to do something risky or to pursue a policy that is based on Moonie economics, which has never worked anywhere?
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Great perspective David, it’s a real pity that nobody in power or with influence can see things the way you do.
I keep reading your articles, it’s like watching a train wreck.
There doesn’t seem to be any hope for this country.
Hi, I happen to think that the people in charge know David is right economically but are constrained by the fear that if they get more aggressive they will spook the markets. If we lose our capacity to borrow in the short term we are all in the do do. I still feel that if we were to narrow the gap within the body corporate between the highest earners and the lowest ones by redistributing the profits on an agreed ratio above 6% return on investment we would solve a lot of problems. More money in the pockets of the… Read more »
Supper Moons : As I was reading this article I thought DMCW was in the celestial world looking down on the planet Earth .What he saw was more than three planets in a straight line creating a magnificant Pull of extraordinary proportions never seen before and all in a straight line with Dun Aengus on Inis Mor . The following were the planets : Earth – Anglo Bank Moon – AIB Saturn – INBS Pluto – PTSB And there were other flying objects too numerous to count and unpredictable causing darkness. All lof these were in line with the SUN… Read more »
David wrote: “we are in an intellectual, as well as financial, cul-de-sac”. Too true. What David and other economists fail to explain is that all economic theories tend to favour ‘Big’ and (if possible) ‘Global’ over ‘Small’ and ‘Local’ in every conceivable circumstance. Naturally, those theories are hallowed and supported by those who think ‘Big’ and benefit most from the inevitable outcome, which is to impoverish those who think ‘Small’ and ‘Local’. Our Celtic neighbours in Scotland gradually became aware that they weren’t getting their fair share of the North Sea revenue from the United Kingdom and began to support… Read more »
Malcolm – I agree . Root Power .
One massive problem with Irish politics is that if a politician can believe and inact whatever ridiculous economic theory they feel like with little or no consequences. The Irish electorate is not demanding politicians who are competent at managing economies, thus we’re getting the same old policies.
Despite the depressing times its great to get updated on economic thinking and theory. At the end of the day those in power are working hard to retain the status quo and maintain a system that benefits the few. We are just proceeding with the transfer of the wealth from the many to the few. They will package it in any theory to try and make it fit on the plate they present to the public. There is little the public can do about it. We live in the delusion of a democracy. We are prisoners of our training and… Read more »
David,
Its a duck sure but don’t fool yourself that is is incompetence alone; there is method to their madness.
You have to ask “cui bono” – Who benefits?
Firstly, by Ireland paying for bank losses “cui bono”?.
Secondly, by Ireland having a sovereign default “cui bono”?.
You have to understand that those who are encouraging the policy will benefit from both. There is simply too much at stake for this to be blind incompetence.
Well I don’t believe it DMcW is actually saying that people saving is bad , that saving is a problem….absolute stupidity. I am a saver and its the one thing taht makes me sleep well at night. The other point is that government cuts are absolutely necessary we have no choice because the EU tells us to cut , we have to get our budget deficit down to 4 billion ( GDP 130 billion ) by 2014 from its current 19.5 billion. And in fact our budget deficit for 2010 will be in the region of 26 billion because of… Read more »
if it looks like a duck and quacks like a duck it is a duck, unless you have so much government involvement that tells you otherwise…
thats the heading that makes sense now in ireland.
we so need an irish wing of the TEA PARTY
Half way through the piece you asked if we were still awake. After learning that the gubberment is caving in to corporate demands for lower electricity prices and that unemployed people like myself will be paying for it you can bet your arse that I am somewhat awake. We are European champions at taking pain and I have it on good authority that we have an excellent chance in the world club pain championship. We are catholics after all we have no pain limits. Spank me baby. Newsweek magazine said Mr Clown is the best T-shock ever because Big Biff… Read more »
David, I totally agree that it is economic vandalism to give “money to bail out bust banks – even when other banks are closing down here and getting out of their own volition – but not to build hospitals or invest in education. But,as an non-economist, I read what seems to be general consensus that not bailing out Lehman Bros. was a mistake, notwithstanding moral hazard, the principle of capitalism that investors take the consequences of their risk-taking and so on. I’d like to know if you agree with this consensus and if so / not why. I suspect the… Read more »
Well, if the government isn’t spending your money, then you get to spend it yourself, goes the theory. Which assumes, unfortunately, that the government returns your unspent taxes. If only…
And if they cut and raised them according to economic performance every year, maybe that would work too.
Otherwise, the government just keeps spending on white elephant projects, whereas citizens, it is assumed, would be smarter with our own money.
Iceland, which did a lot of what David recommended, is getting itself out of the mess. Yes it is difficult. In fact it is extremely tough. Inflation is bad. Wages are stagnant. But employment and the trade situation are getting better. Greece, is going into a spiral of stupidity and debt. Greece is led by Cowen’s long time buddy in EU ‘hooleys’, (how do these turkeys find each other ?). There is something systemically wrong with our economy, in that it requires a borrowing rate of 200 Million Euro per week to sustain itself. The current trajectory does not lead… Read more »
“To achieve growth, we have to do something radical.”
Something concerning the labour market, perhaps ?
Or maybe fix our cost base, so that the labour market is allowed to function faster ?
One thing is certain, borrowing, jawboning, wasting public funds, misallocating resources, and stiffling inefficiency time are not strategies.
I am coming around to the view that the misallocation of resources as a result of the crack up boom/low interest rates/borrowing that there will not possibly be a fast solution.
So, we are back to where we were 4 years ago, and every few months since: “OK, then what?”. Let us say that one bright morning, the gods swooped down and made all our debts go away, corporate, government, and personal. We all looked at our screens, paper statements, and whatever else, and there was simply no sign of what had been there before. Gone. All of it. Even those who were on the other side of the debts, Gunther et al, had magically had all their loans repaid in full. This is the economic policy called “Olympus”, and it… Read more »
The Government needs to stop spending like there’s no tomorrow, and cut out the excessive borrowing. Why not cut the bond markets out of the equation altogether by trimming all the fat, and bringing spending into line with tax take? Devaluation, or leaving the Euro, is not the answer either. Devaluation is like the slimfast plan ; you get a temporary boost, but because it brings about no behavioural change, it ends up being of no use. Eventually you end up back at square one. The discipline of a hard currency, and the necessity to internally reform in order to… Read more »
Hi David, Just registered so i can start leaving comments but i have been following you and other sensible, informed and qualified economists; McDowell, Gurdgiev, etc, who contrast the buffoons in Gov or DoF. However is there a fundamental problem with using growth to be the solution of our (local and global) economic and consequent social problems. Is this not analogous to the alcoholic deciding that whiskey is the source of his misery and so he changes to vodka. Given human nature, ingenuity and greed he will merely get around the new controls which will “prevent financial institutions behaving so… Read more »
@ Karlos. You are wrong there! Lets look at some of the terms of the austerian/non austerian debate right now. On the one hand, austerians say we need government cutbacks on public spending. Non austerians say ‘no’ to this, we need to spend our way out of this! Perhaps there’s misunderstanding between both camps. Just heard Stiglitz talk of the need for careful stimulus, careful public spending, unwise and blind cutbacks of 3% leading to a double dip if carried out in Europe. What both groups agree is wasteful public spending must be curtailed. This includes spending to stimulate property… Read more »
‘If it looks like a Duck’ – this does not mean ‘it’s a Duck to water ‘.We sometimes are all Ducks on this forum and we seem to believe we can live a ‘cyber lifestyle’ and forget the reality that ‘water’ is our natural abode where we can only rest and play.We deliberate with many insights and inspirations in this room and none of us cry ‘PAIN’.Until we feel the ‘Need’ we remain a ‘Dry Duck’. ‘Inertia’ is liken to eel like fish who decides one day he wants to leave the river and grow legs to walk on land.Unfortunately… Read more »
The essential underlying cause and continuation of the economic disaster in Ireland is gross incompetence, which is ongoing. The buffoons who ran our economy into the ground, and still waddle onwards with the same ineptitude and dim witted perception of reality, need to be expelled to never ending darkness. Only when we have complete and utter reversal and change of systems, policies, and government across all sectors, will there be a glimmer of hope. Until then watch us sink deeper and deeper into the abyss. The markets have heard the lies, they have analysed them, they have found us wanting.… Read more »
Science is seen as a more intellectual pursuit than perceived greasy handed engineering? Yet another aspect of the Irish unwillingness to get down and dirty and make wealth.
Its nice to have Dave at least still pointing out how our elected officals and various government departments can improve their performance. I encourage him to continue in this task. Perhaps the subscribers could also contact our elected representitives by email or otherwise with good suggestions on how to proceed from here. A good example was the recent property tax suggested which was shot down by some TD’s. They claimed that their constituents were not happy with that and lobbied them about it. This shows the power of the property owner in Ireland, one of only a few countries with… Read more »
I should say that protecting assets values for consitituents is not the only reason so much money is being unwisely spent on the banks, the influence of the banks themselves in Ireland, the people employed in the banks, keeping up appearences internationally, etc, etc. However the point is that it is a substantial reason. As long as there are more constituents/buisnesses harrasing their TD’s to maintain asset values at all costs than those that want to stop wasting money on the banks there will be no change. Incidentilly the government recently issued a report on the advice that they used/use… Read more »
Irish stockbroking outfits have been talking up CRH for the past week. There is a reason for this. CRH is 26% of the ISEQ. It is number 1 by a long stretch. From reading pronouncements from Goodbody, Davy, etc, you would think that CRH is undervalued. Davy have been stating that CRH has a floor in value based on the replacement costs of it’s assets. Many people would then assume that the skills of the institution would be added to this as a further asset. There is a contrary opinion on this from Phoenix Magazine. Phoenix Magazine looks at CRH… Read more »
Are there any legal grounds,through the constitution or otherwise,to force these shysters to call the by-elections that are long overdue and force them out that way?
And if and when a general election is called,are the forces for real change sufficiently focussed to have a chance of winning?
Time to saddle up!
Maybe this is what people were trying to forestall, and counter……
http://www.zerohedge.com/article/europe-prepares-bloodbath-open-after-ireland-lowered-sp-aa-aa-outlook-negative
David.
Its not that difficult to understand.
The vested interests / insiders are not interested in the dynamics you think they are concerned with.
There is a legal term here for this, cant think of hand what it is, but, its where a person is made think that a counterparty interest lies somwhere else other than where they are spoofing others to be fooled into thinking something else.
Incidentally, Article 22 1. 1° A Money Bill means a Bill which contains only provisions dealing with all or any of the following matters, namely, the imposition, repeal, remission, alteration or regulation of taxation; the imposition for the payment of debt or other financial purposes of charges on public moneys or the variation or repeal of any such charges; supply; the appropriation, receipt, custody, issue or audit of accounts of public money; the raising or guarantee of any loan or the repayment thereof; matters subordinate and incidental to these matters or any of them. 2° In this definition the expressions… Read more »
Gal – Today a new dawn arrives as the earlier full moon last night begins to slowley cover its face to look into the darkness once more for another oracle. Last night we saw its beauty and strength and how it does change in a moment from something else it was before . It is the bearer of ‘change’ and in good fashion it showed that on our ‘soverign face ‘ a new re-allignment in our ‘soverign ratings’has been revealed to all of us that sets the ‘truth’ of the direction we are really taking. DMCW red hair piece has… Read more »
I like the idea of having stronger local Government suggested by Malcolm above – local taxes, services etc. Mr Allen’s analogy of us falling to tribal pieces aligns with this very well. Main problem is that the Dail Eireann is not for Eire. It’s for D4 and other nascent west brits. Our lack of by-elections and deliberate under representation suggests equally we have too too many TDs and that locally, people are disengaged. It’s a duck all right….a sitting duck for the next line of hare brained leadership. We are a marketer’s dream – customers without opinion, accepting of all… Read more »
Furrylugs – thank you once again concerning Bunreacht na hEireann. You went to the trouble of finding out where the current situation stands, and you found out. And the results are interesting. I have cross-referenced this to Wikipedia. http://en.wikipedia.org/wiki/County_Waterford County Waterford has a population (2006) of 107961. County Waterford also has 3 current TDs. This equates to 107961 / 3 => 35987 citizens per representatives in the Dail. This is too high compared to the requirements of the consitution !! This is very clear cut. Therefore the current Dail is unconstitutional, because Waterford is not sufficiently represented !!!! I do… Read more »
Amused concerning Cowen getting caught smoking in breach of the law. Of course, Cowen is no stranger to breaking rules, the law or ignoring the consitution. (just look a the by-elections and the current representation from the involved Dail constituencies). But amused that it was something small, and it was picked up by an ordinary citizen – who probably seen an opportunity for putting Cowen in his place for once. We can presume that this was a law-abiding citizen, who has had enough of NAMA, Anglo, Nepoto, and the BS coming from Kildare Street/Merrion Square. Conor Caseby did much much… Read more »
latest from Peter Mathews
http://bankermathews.com/2010/08/23/misleading-reporting-and-mounting-loan-losses-at-the-irish-banks/
@tony_murphy According to Peter Mathews, Anglo and INBS should be closed down, total agreement from me there:) “What should, of course, now happen (it should have happened soon after the Blanket guarantee was put in place) is that Bondholders in the 3 institutions should be directed by the State to contribute to this re-cap at a level of say €6.5bn in appropriate proportions. [As part of this restructuring, the State might offer bondholders a small (token) debt for equity swap]. The State would invest the balance of €11bn by way of a State Banks Re-Cap Bond issue (zero coupon). The… Read more »
Lest we forget!
http://quotesfromthebubble.blogspot.com/search/label/CB%20Richard%20Ellis
Many of us are condemning David’s implications. Myself as much as any. I was listening to an interesting podcast today, regarding the social and economic state of the US. It’s a pretty left wing show, so I have the requisite political filter on about level 7. During the discussion one of the participants dropped a comment about “obviously not wanting to end up like Britain, having lost almost it’s entire productive capacity”. This was clearly a non-contentious comment, but he went on to say that “even if Britain is able to survive on Financial Services, Tourism, and Real Estate, the… Read more »
I have to really wonder about those who promote austerity and have this warm fuzzy feeling about their savings like the user ‘paddyjones’. Anyone whose savings allows them to sleep soundly at night doesn’t really understand money. Savings is merely the other side of the lending equation. Your savings doesn’t represent hard money, it is backed by loans that banks have lent. Everyone knows this point yet fail to fully appreciate its wider implications. In many ways the Irish government is protecting the ordinary Irish saver (either directly or through pension funds etc), which is why those people defend them… Read more »
Flash 13 – I enjoyed reading your ideas .My comments include : 1 Bank Loan agreements have no priveledges to the borrower as in marriage : and 2 Egg Timers should be attached to promises/vouchers to repay and unless the lender re – evaluates the borrowers capacity periodically any failure by the borrower to be able to repay should become a loss to the lender ; and 3 Virtue to the borrower should be enscrined in any contract and both lender and borrower are on level playing fields ; and 4 The Lender must be responsible for the potatoes too… Read more »
correction :
4 The Lender should be responsible for the potatoes too and should they rot the lender shares thoses losses too.
‘Pain’ should be brought back into the short term memory bank and taken from the deep memory vaults to increase our awareness of reality.
Well, it appears that the bank gaurantee is no in trouble – as a result of the fact that the fiscal strength of the Irish state itself is being subsumed by Anglo, Nepoto, and NAMA. This is basically what the ordinary joe soaps have been figuring all along – that the scale of the hit from taking on these three turkey projects is too much. Hence popular discontent over the bailouts. Common sense was saying to walk away from Anglo. The problem with common sense is that it has been progressively and consciously driven out of fashion in Ireland over… Read more »
I understand the point you’re making, but savers don’t exclusively save and spend nothing. We’re perhaps thinking on different levels; you on a macro level, me on a micro level. If I spend what’s necessary, indulge in a little luxury from time to time, but still save a bit should something untoward happen, then surely this is a sensible approach to take? I think the savers did care about borrowers running amok; hence the anger in Germany when their coin was being used to bail out the over-indulgent PIGGS, but of course what recourse can one take to object? There’s… Read more »
There seems to be this refrain that we need spending to get us out of the mess. But the problem is the spending that has already occurred. It is now blatently obvious that a lof of the spending in the Irish economy was wasted. By wasted, I mean allocated to products and services that have done nothing to increase the productive capital of the economy in the long run. The most glaring example is with respect to real estate. Ireland is now facing a long winter of repayment, settlement, clearance, and deflation as a direct result of an asset price… Read more »
@colm brazel
Hmmm, yes i’ve been thinking / worrying about this of late, as the savings I have, have been built up for a business I plan to start when the time is right, if ever!
Its in AIB at present, but i’m seriously thinking of putting it in Rabobank, what with it being rated AAA and number six on the worlds top 50 banks. What do you think, would it be a wise move?
Thanks
Deco – time is not on your side our dogs will not change their spots they see no diiference and they believe the taxpayer will not notice any difference afterall try to change spots and you get the same re allocated to a different space .So our dogs become illusionists convincing spot change is good for you even with the same spots.
We need to import more Christoph Muellers ( Aer Lingus ) to take charge to enforce new rules and rid the old class crony system and D4 connections.
@Flash13
Only person who believes the system is broken? On the contrary:
http://www.zerohedge.com/article/alan-greenspan-financial-system-broke
motar
NAMA = Nationale Allemaigne Mess Accumulation
( underwritten by DB ( Deutsch Bank) )
ECB Notice : Other EU countries may apply to be considered to be included for Marshall Plan II
conditions : proof that you purchased mercedes and volkswagons
News today on TodayFM or Newstalk Ireland has “successfully” borrowed 650million Euros at 2.3%? due to be paid back by April 2011, YIPPEE!, 6 times the rate Germany would pay for it. The Stock brokers interviewed are delighted, it’s great news!!. They bonds were great demand, 10 times oversubscribed apparently. I wonder how much the ECB bought/wanted to buy? Also, a Cat took the dart yesterday from Malahide and is now at the dart headquaters. Could the owner please contact the dart office to pick up their Cat. Barry Kelly from Iaraoid Eireann has spent the day taking calls from… Read more »