“History doesn’t repeat itself, but it does rhyme.” – Mark Twain
The story has become the stuff of legend. Years ago, an informal group of free-market oriented civil servants, politicians, economists, and “in the know” media types, gathered periodically for beery conversation at the Dublin pub of Doheny & Nesbitts. Acquiring power and influence, they induced Ireland to accept the modern elixir of Neoliberalism. Taxes on corporations and incomes were lowered (even as more regressive forms of taxation were enhanced), privatization was embraced, financial markets deregulated, import duties reduced, and the nation adopted a fixed exchange rate (the Euro) to enhance the flow of foreign investment. European money poured into the country, real estate prices and stock market quotations took off, and Irish banks booked profits on their increasingly leveraged portfolio of commercial and mortgage loans. Although the banks were deregulated and largely unsupervised, few evinced concern. After all, did not the flow of funds from banks across Europe represent an endorsement of Irish banking policies and practices? Besides, didn’t Alan Greenspan and Lawrence Summers point out that financial markets are self-supervising and self-regulating?
With credit expanding rapidly, Irish business conditions appeared to have moved permanently to a new level. With a massive surge in the building of commercial real estate and high-end condos, old downtowns were suddenly ‘fabulous’ and pricey. The newly prosperous were highly visible and conspicuous consumption was increasingly the norm. Jobs were being created in a service sector expanding rapidly to meet the whims of the ‘great and the good,’ along with the multitude aspiring to join or mimic them. Neither was the middle class neglected. Banks now flush with excess funds were offering low interest rates that, when conjoined with sharply reduced lending standards, allowed the middle class to purchase these increasingly expensive homes. But, again, there was no need for worry. With Ireland’s ‘economic miracle’ firmly in place, incomes and home prices would undoubtedly continue their rise.
“Stein’s Law,” famously promulgated by the late economist Herbert Stein, maintains that “If a process can not go on forever, it will stop.” Ireland’s bubble, like all the others, had to end. Sadly for the utopian purveyors of free-market ideology, financial bubbles are disinclined to dissipate gradually; their tendency is to implode. Ireland’s bubble is imploding.
The Irish authorities fell back upon a time-honored script. Initially they emphatically denied that a problem, much less a bank solvency problem, existed. Although the stock market was declining rapidly from its highs of May 2007 (it is now off by 70%), and foreclosures and unemployment were rising quickly, the government asserted that the problem was only a passing seizing up that could be readily fixed with a once-off dose of liquidity. Betting the public’s money on their hollow assertions, the government boldly (and recklessly) guaranteed the payment of all depositors and senior bondholders of the nation’s major banks (the latter being predominantly foreign banks). Little was asked of banks in return for this largesse, neither cuts in dividends nor changes in management nor reduction of leverage ratios, etc. Of course, the terms did mean that shareholders and subordinated bondholders (mostly Irish citizens and savers), and taxpayers would be left to take whatever losses ensued.
Given their overexposure to shaky real estate loans, and the steady withdrawal of large funders and counterparties, the banks continued to hemorrhage red ink even after these guarantees and loans went through. It was, or should have been, immediately evident that the banks’ losses would be greater than the government’s resources. However, these initial loans and guarantees did hold up long enough to enable well-placed insiders, and many of the more nimble and adroit outside investors, to exit before the final denouement. Of more lasting consequence, the government’s initial response transformed a severe banking crisis into a broader and more damaging fiscal crisis. Coming so soon after Argentina and Iceland, this script and how it would progress should have been reasonably clear to the authorities. According to Morgan Kelly, an economist at University College Dublin, “Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter.” (The Irish Times, Nov. 8, 2010)
By agreeing to their bailout offer, Ireland’s government will soon owe the International Monetary Fund and European Union substantial sums of money denominated in a currency (the Euro) they cannot issue. By design, this fact limits their policy responses to squeezing their own citizenry. Considering: (1) the size of the loan relative to the size of the Ireland’s GDP and government revenues, (2) the state of the economy today and its prospects over the near-to-medium future, and (3) the relatively high (5.8%) interest rate, default may be a more reasonable option. Perceiving this possibility, the terms set by the IMF/EU demand that the emergency loan include a substantial ‘buy in’ out of the monies previously set aside for Ireland’s National Pensions Reserve Fund. This will, as one prominent EU official so disarmingly admits, shore up the Irish public’s “ownership and commitment” to the plan. Stated simply, the livelihoods of Irish pensioners will now be hostages to this agreement.
So the stage has been set. The IMF, EU, and Irish government have all agreed that the best way forward is to shift the costs and risks associated with the rescuing these banks to those who had nothing to do with making the decisions that created this fiasco, and who benefitted the least. More and higher taxes for the middle and working classes, lower wages for state employees, higher tuition for students, and less assistance for the poor and unemployed are all in the works. The budget even reduces allowances for the parents of young children! Higher income groups, the wealthy, corporations, almost all bank executives, and foreign lenders to Irish banks (who should, and could, have done their ‘due diligence’), will be rescued.
Naomi Klein coined the phrase “disaster capitalism” to describe the practice – long ago perfected by the IMF, the World Bank, and the United States Treasury – of taking advantage of the political turmoil induced by a financial crisis to push through otherwise unpopular or undesirable economic ‘reforms.’ The IMF/EU bankers and bureaucrats have clearly perceived an exceptional opportunity in the Irish crisis. Consider that for at least five years, the EU and prominent Irish business interests have been pressing homeowners to accept water meters so that they can pay for water on a per-unit basis, undoubtedly as a prelude to full privatization. Likewise, business interests have an almost instinctive dislike for minimum wages. Can anyone be surprised to learn that the IMF/EU’s loans are conditional on the widespread installation of water meters and a reduced minimum wage? What do water meters and minimum wages have to do with the lax bank lending standards, deregulation, and the irresponsible government decisions that created, nurtured, and ultimately federalized this banking crisis? Nothing. As neither of these policies will do much to enhance Ireland’s ability to raise the revenues required to pay these onerous loans, it should be evident that their rationale lies elsewhere.
It is evident that Ireland’s best way forward is a return to solid economic growth. While difficult politically, an outline of the economics is fairly straight-forward. The first step is to reject the proposed IMF/EU loan while reinstating an independent Irish currency. This will allow the Irish Central Bank to set interest rates best suited to domestic needs, and establish an exchange rate favorable to a healthy balance of trade surplus. The next step would be a renegotiation of the debt (with debt-holders being made to understand that the alternative, as in Argentina, will be a unilateral offer by the government). A stimulus of the economy though greater government spending (ideally an explicit jobs bill), and the establishment of an effective resolution to homeowner over-indebtedness are also needed. Alternatively, the Irish could live under an economic policy imposed by unelected and unaccountable foreign overseers – just as they did during 800 years of English hegemony.