OK it’s way past my bedtime but I couldn’t resist showing you this. I was researching something when I was struck by the similarity between these two diagrams. On the left we have income inequality – roughly speaking, the difference between the richest and the poorest fifth of each society. On the right we have the amount of debt that countries across the EU have gotten into in the last few years.
Broadly speaking, it’s the most unequal countries that are also the most indebted. How does that happen? The ‘liberalisation’ of many economies in the past decades was ostensibly meant to make them richer. The effect though has been very different. Low-tax countries are having to borrow in order to meet expenditure, particularly when times get tough. Meanwhile their lack of redistribution means that citizens are encouraged to borrow in order to compete socially – sometimes even to meet basic expenses. This private indebtedness tends quickly to become public when lenders collapse.
In short, trickle-down economics is really trickle-away. Though a minority of individuals within them are of course better off, countries that cut back on tax and expenditure end up impoverished over all. People seem to vote for such policies in the optimistic hope that they will somehow get into that ever smaller, ever richer minority. The odds suggest that they should buy lottery tickets instead.
Somebody on the radio saying they’re going abroad to declare bankruptcy. A different holiday idea I suppose. Naturally others soon phoned in to object to this “moral hazard“, as the banks would like us to call it. It was wrong they said to walk away from your mortgaged home just because you owed more on it than it was worth.
That got me thinking about what debt actually means. Is there a moral obligation to repay?
Well of course there is. It’s a matter of trust, which is what morality is basically all about. If you’re in a business, you were given materials and help by your workers and suppliers. You are obliged to pay them so they in turn can pay their helpers and suppliers and so on. The wheels of the economy keep turning and everyone gets fed. A financial debt is a promise like any other.
However there is one important qualification. You are only indebted when and if you actually receive something.
The banks will argue of course that they gave you money when you signed that mortgage so you are obviously obliged to repay it, along with the agreed interest. But the thing is, did they actually give you money?
No. They never gave it to you, because they never had it to give to you.
I don’t mean they didn’t have it in their vaults; we all know that’s not how finance works. All loans are borrowed, when it comes down to it, from the future. They’re based on the reasonable prediction that most of the time they will be paid back in full and with interest. But when the banks decided instead to start making ludicrous loans for several times the value of the houses they were raised against, thereby further escalating the price of housing and so allowing them to offer even bigger loans, they knew that ultimately the whole thing had to blow up. The loans were fake. There was no money in the future to borrow from.
When the inevitable crash came the banks of course had a parachute: They were too big to fail – or so at least they managed to convince themselves. And with themselves convinced they had little trouble convincing the political parties they were going out with – who effectively promised that they would make this impossible future money somehow magically become real money.
Or to be precise, they promised that we would.
The money you seemed to get from the bank ultimately came therefore out of your own pocket. You were tricked into lending it to yourself so that they could take a cut. It’s immoral to stop repaying that? It’s probably immoral to keep going.
Besides, you will only be a little ahead of the crowd. It should come as no surprise that even with all of us working together we can’t actually afford to turn the banks’ lies into reality. The State itself is going to default at some point. That is as inevitable now as the property crash was. Our public debt is soon going to be 200% of GDP, and the harder we try to pay it the less we will be able to; we are being crushed in fact by the burden of trying. Actual people being crushed, by imagined money.
Listening to Michael Noonan yesterday worried me for a number of reasons. Firstly, because he’s Minister for Finance. That never strikes me as an ideal arrangement. Worse though, he sounded worried and downcast. This on the day when, at long last, it looks like we’re going to get some deal on the bank debt burden. That’s supposed to be about the best news you could possibly hope for.
If you’re a Noonan, that is. In a world where there is no choice but to force the taxpayer to reward the speculator, the best it seems we can hope for is to get the immediate liability for those bond repayments converted into a long term loan from the European Stability Mechanism (ESM), so taking away the looming danger of default. This will improve our credit rating, meaning we’ll be able to borrow the money to repay the bank debts all by ourselves. Whoopee!
Yeah. No wonder he sounds depressed.
The even less joysome part is that there is clearly going to be no write-down. Arguably in fact, the new mechanism will mean that we’ll be closing off any future possibility of burning the bondholders because now the debt will be to the ESM rather than the reckless lenders themselves. So less of a deal, more a sort of… trap.
A Dáil committee debate; someone yet again makes the point that if we selectively burn lenders now, they will remember it if we ever want to borrow again.
The government’s logic seems to be that the bank debts taken on – but not created – by the State are just like all public borrowing now. But they’re not the same. It was money lent into an overheated credit market by reckless lenders. Just as our banks made loans they should not have, those international institutions lent money they should not have lent to our banks. They took unreasonable risks, they stoked a boom, and they helped collapse the entire Irish banking industry.