This – This – Will Fix The Economy

Estate agents insist that property prices in Dublin have stabilised. I remember the first time they said that, back in 2007. And they’ve stabilized regularly ever since.

But you can’t exactly disagree. In a way, house prices are always stable. A house is always worth… about a house. A person can eat a lot or a little food, own a hundred cars or none, but houses tend to stabilise somewhere around the level of one per every two adults. Because try as you might, you can’t live in much more than one house at a time. Logically then, housing ought to be one of the most stable commodities on the market. It’s actually the rest of the economy that has been vigorously swung around this anchor point. During the housing boom, wages may have gone up on paper, but in house-buying terms they plunged through the floor.

Which gives me an idea… We need a new currency, right? The euro, well, it’s lovely and all. I like the colours, and the handy map on the back. But the thing is, we just can’t really afford it. Using the euro is like having a currency on the gold standard when the world is desperately short of gold. You can’t have a functional economy when the standard unit of exchange is hen’s teeth.

And what do we have plenty of? Why, houses! Too many houses, not enough euro banknotes. Think about it.

Of course you can’t put houses in your wallet or bring them to the shops. There will still have to be tokens. But the base currency unit should be fixed to the value of the standard house – say the sort of small two-bedroom starter home that was produced like popcorn during the boom. Notes should be denominated in fractions of a house. That way, the price of a home can never run away from you. Save up 1,000 of the new thousandth-of-a-house notes, and you can exchange them for one standard house at your nearest branch of NAMA.

It won’t stop people charging more than the standard house price of course, for bigger residences in better locations. But the existence of a perfectly adequate house at a fixed price – well, a price that money is fixed to – should act as a powerful stabilising influence. You’ll be able to look at a property ad and say “Well it’s a good house. But is it really worth two houses?”

What If We Voted No? Your Questions Answered

Irish Times clock on the new building at Towns...
Sign Of The Times. Geddit? God I’m Stuck For An Illustration Today

Yesterday’s post about Ireland’s alternatives to the ESM elicited such a bunch of interesting questions it would really take all day to answer them properly. So that’s what I’ll do.

Ciarán Ferrie of Ireland pointed out:

I found a disturbing little nugget in the fourth paragraph of Paul Gillespie’s opinion piece in the Irish Times on Saturday – In effect, if we vote NO to the treaty, not only will we not be able to draw down funds from the ESM but we will still be obliged to contribute to its initial capital. I think Vincent Browne may have alluded to this double-bind on his show a couple of times but I’m only just realising the implications of it.

I’m assuming that this was agreed before the AG dropped the bombshell of the requirement for a referendum and that the government had assumed they could push the treaty through the Oireachtas unchallenged. Whatever the reasons it puts us in an invidious position with regard to the ESM in the event of a NO vote.

True, but having a chance to claw back what we pay in is hardly a good reason to vote Yes. Really, this is a much better argument for not ratifying the ESM treaty at all.

Which is still an option (even leaving aside the Pringle case, which may yet decide that they can’t ratify it without another referendum), and I think this amendment failing would provide the government with the perfect pretext not to.

They may well do it anyway though – to bolster Ireland’s boy-scout europhile reputation (what good did that do us again?) and to not rock an already waterlogged boat. €1.27 billion over the next three years seems almost like small change compared to our deficit. Though of course that does rather overlook the fact that we’re liable for anything up to €11 billion – in the unlikely event of anyone, you know, actually needing a bailout.

Regular reader Azijn from The Netherlands said:

You mention several times that under the ESM you wouldn’t be able to “invest in growth”. I don’t really understand what you mean by this. What is the precise ESM policy that prevents this? I thought it was mainly a severe constraint on the budget, with very strict rules about the size of deficit spending. (Just like the IMF would).

To deal with this bit first: The EMS – or more correctly the Fiscal Compact we must join to enter it – will compel us to cut government spending at nearly twice the pace we’re already slashing away. Even leaving the immediate human cost aside for a moment, this will have the effect of further shrinking the economy, further reducing the tax take… A vicious cycle looms.

The way to break that cycle would be to borrow and spend as soon as possible to stimulate growth; classical Keynesianism. The IMF – or of course commercial lenders – would have no ideological objection. The Fiscal Compact however requires that, with some leeway for cyclical fluctuation only, governments borrow no more than 0.5% more than income. In other words it bans Keynesianism in perpetuity, for no better reason apparently than German mistrust of it (as I discussed here).

Aside that, you provide a very clear analysis of all the options. It’s sadly clear that all the options, including your preferred one, have major downsides. There’s no silver bullet for the economic problems of Ireland. Or Europe, for that matter.

Especially, because it’s not just conjuncture and aftermath of the mega-losses in the housing and financial markets. A big problem is that while all this is going on, all European countries are concurrently facing the huge (huge!) increases required to simply keep up expenditures in healthcare and retirement funding.

That’s where the biggest pain of ‘austerity’ is felt, but I always find it a tough topic. On the one hand, it’s easy to depict those cutting in the healthcare and retirement budgets as “robbing the sick and elderly”. On the other, it’s a reality that these (often overlapping) groups are experiencing skyrocketing costs.

If any of the “nuclear” options, such as leaving the Euro are chosen, these people will _still_ be among the hardest hit. Also, is it fair to ask younger generations to display solidarity for the elderly, but not ask it all of the elderly?

Well I’m seeing it quite differently. The sick and elderly are my highest priority, and I wouldn’t be suggesting these nuclear options unless I thought they would be better for the vulnerable in society than the merciless constraints of the Fiscal Compact.

Our economy is healthy by the measure that matters most – balance of payments. We ought to be able to raise more money to prevent the sick and elderly getting the brunt of this. To a great extent, it’s Euro membership that is tying our hands. A major factor scaring lenders off now is the possibility that the Euro could collapse, or that we’d crash out of it. If we get that over with, we suddenly become a far more attractive risk. (And of course, our balance of payments gets even better.) It would be hugely disruptive and scary, but very probably preferable to slow economic constriction.

I don’t know what you really mean by solidarity on the part of the elderly though. We’ve already raised the retirement age, I’m not sure what more they can do. Unless you’re subtly suggesting we try legalizing assisted suicide here…

I answered this one yesterday, but I include that here, with a little expansion, for completeness. Hilary Chapman (no known relation) from the UK asks: 

Would it not be best for Ireland to share the currency of Northern Ireland, Scotland, Wales and England, i.e, the pound / punt? Ireland’s economy is so tied up to that of its near neighbours that the euro is an aberration.

That would be a hugely retrograde step. The old Irish pound was pegged to the UK pound from independence until the mid-70s – not exactly an era of sparkling economic performance. A currency union tended to steer business towards or through the UK, only exacerbating the geographic disadvantage of having a larger country effectively sitting between us and the wider world.

So the general thrust of policy for decades has been to untie the economy from our nearest neighbours! Mainly, by finding new trading partners. (And whatever about its downsides, the Euro has definitely been a help in this.) Decades of separate development have made the UK’s importance for trade much smaller than you may think.

You will see shops in Ireland full of UK brands (and indeed, high streets full of UK chains); we certainly do still import a huge amount of retail goods from there. But that may give a misleading impression. From getting virtually 100% of our imports from the UK at independence, we now source less than a third there. In exports we send more goods to the Eurozone, and the US has long overtaken the UK as our single biggest customer.

We may have troubles right now, in other words, but there’s really no going back.

*      *      *

If we do leave the Euro we would first of all devalue significantly of course – but then I think we’d start shadowing it again, with a view to eventually rejoining. I would certainly prefer though if we could rejoin – or stay in – a much modified Euro. One better geared for the benefit of the EU as a whole, less engineered for Germany’s particular insecurities.

I do sincerely sympathise with German concerns however. Inflation, in post-crash circumstances not so different from those now, is seen as a major contributing factor to the collapse of democracy in the 1930s. But preventing the currency inflating doesn’t make the causes of that economic dysfunction vanish. In inter-war Germany, these were largely the heavy burden of debt and restrictions on self-determination imposed on the country by its neighbours, whereas now…

Hmm.

So Where Do We Get The Money?

Cover of "Irish Gold (Nuala Anne McGrail ...They tell us we have to vote Yes to access ESM (European Stability Mechanism) funding, in case we ever find ourselves unable to meet current expenditure. But will it really be our only option? It had better not be – the ESM may never come into being after all. Would it be the best? Only in the sense that it might be cheapest. As I argued yesterday, in every other way it is probably the worst option conceivable, less a loan mechanism than a sort of national receivership. I do not believe we can meet its terms.

So what are the other, officially-denied options? You could categorise them in different ways, but I basically see five. I put them here in not my preferred order, but in what I think is roughly the order of likelihood that they’ll be resorted to (though likeliest of all I think is two or more in combination):

1) The EFSF (European Financial Stability Facility). This is the fund we’re currently availing of for the EU/IMF bailout, and though the ESM with its stricter and (it is hoped) more sustainable rules is meant to replace it, the EFSF will continue to exist for more than another year. Hopefully in that time it will become clear whether we need to borrow more.

2) The IMF (International Monetary Fund). The IMF may have a reputation for setting tough conditions on loans, but unlike the ESM it has no entrenched ideological opposition to countries investing in growth. Some argue that they would refuse to loan to countries that the EU had refused, but the organisation itself has not pronounced either way. And as a partner in our current bailout, the IMF has invested in us already. It is not known for letting its investments go bankrupt.

3) Leaving the Euro. Get out in some semi-ordered way, before we’re forced out precipitously like Greece could be any day now. Devaluing our currency rapidly would solve a lot of our problems, but it would not be painless; imports would leap up in price, effectively making us all poorer immediately. But it would be a huge boost for industry and jobs, sparking immediate actual growth. Indeed, much as I am in favour of the single currency in (broad) principle, it is virtually undeniable that we’d be better off now if we’d never joined. Its inertia has only served to exacerbate both boom and bust.

4) Debt Repudiation/Restructuring. The nuclear option to some, the obvious first step to others. In part this is because we have two main sources of debt, so morally different that they need to be taken separately:

(a) Bailout Debt. However pressured we may have been when we agreed to this, there is a strong moral imperative to, you know, do what we said we’d do. But that is not the highest of all values. Debt repayment does not trump such imperatives as, say, not letting people starve. You can always repay a debt later, but people die for good. No one claims it wouldn’t be a drastic step. It is bound to have negative consequences on other countries, and after we did it we’d be pretty much on our own. But remember the adage – if you owe the bank a million, they have a problem. We shouldn’t be afraid to contemplate default if it can win us better terms.

Most likely of course 3 and 4 would need to be done together, as debts denominated in Euros would be so much more painful if we’re paying in Irish Fairy Gold or whatever. (If we’re getting a new currency we may as well have some fun with it). And by the same token, if we aren’t repaying our debts I think the Eurozone would prefer if we got the hell out.

(b) Bank Bondholder Debt. This though we should have repudiated long ago. The taxpayer has no conceivable moral duty to repay this private debt. And if the European banking industry will collapse if they don’t, then quite frankly the European banking industry deserves to collapse. Let’s call their bluff on this one.

5) Taxing the rich. This is last on a list in order of likelihood because of course the rich have considerable influence over these decisions, though in a sensible democracy it would be first. It has been pointed out that with only a moderate tax on capital and/or a new upper tax bracket we could pay off our debts without making cuts at all. That may be unrealistic, but could very significant new revenue be raised without causing capital flight or discouraging investment? I think it could. There is money to be made here, all we’d be doing is raising the price of making it. I think the market can bear that.

And let’s not forget that the richest have been consistently increasing their share of the wealth, while simultaneously reducing their tax contribution, since the 1980s. If they don’t start paying their share again now when will they start?

~    &    ~

Well OK, the obvious next question is if all these alternatives exist, why does the government prefer the one that will wreak such havoc?

The answer has to be that they don’t really believe what they are asking us to sign. The draconian terms of the agreement are there to convince the money markets that they won’t profit by breaking up the Euro. In the real world exceptions will be made, just as they were made for Germany when they were in trouble. Right? Perhaps we can fudge what is and isn’t structural deficit; no one seems to know quite what that means so it’s a useful bit of ambiguity. Surely, when it comes down to it, we cannot be held to borrowing limits and repayment rates that would wreck our economy?

Perhaps they sincerely believe that, perhaps it’s even true. But to sign your name to a contract on the basis that you hope it will never be enforced is, to put it mildly, unwise.

Rabbit Of Government Versus Truck Of Euro

So having looked at the reasons to reject the Fiscal Compact, let’s examine the government’s pro-treaty arguments.

 

Fiscal Compact in Ireland - YES Campaign [MEP] Olle Schmidt support
But fear not, here’s the opposi… oh

Well that didn’t take long. Really there is no positive argument beyond the stability of the Euro. As good a thing as that might be, it seems a trifling technicality when compared with the very real and immediate suffering the treaty would impose. So it is perhaps not surprising that the government has focused instead on reasons not to vote no. Effectively they’re reduced to the null argument: Well what would you do? If we need more money, how would you raise it?

By asking this they hope to split opposition. Different opponents of the treaty have different ways they’d prefer to raise income, and if they can move the debate on to that then people may forget it’s not the urgent question. It’s like someone driving straight at an oncoming truck and saying “Well which way would you swerve?” The government’s case rests almost solely on the argument that we may require aid from the European Stability Mechanism (ESM), and that this would be preferable to other loan options. But that’s actually composed of two questionable assumptions:

Firstly, we are obviously going to avoid another “bailout” if we at all can. The necessity will depend very much on global markets, how fast we can regrow our economy and so on. The really mad thing here is that if we sign up for the Fiscal Compact, the restrictions it will place on our opportunities for growth make it so much more likely that we will need a further emergency loan.

If we do, will the new ESM be the best lender? Well it will almost certainly offer the lowest interest rates going – for sure lower than any we’ll be able to get on the open market for a long time. The problem is the  conditions. Obviously the ESM won’t lend us money to invest in growth, because that’s what the whole Fiscal Compact is ideologically opposed to. We can borrow to pay for emergency things, like public wage bills or – irony warning – loan repayments we can’t meet, but not to invest.

And the mad part of this is that if we do sign the treaty, we are committing ourselves to these conditions even if we borrow from somewhere else. Even if we raise funds on the open market, even if we go to the IMF, even if the European Social Fund never comes into existence – which is a very real possibility – we still have a commitment not to borrow to invest, on pain of having our budgets dictated to us. Joining the Fiscal Compact is agreeing to abide by the conditions of a loan we may never get. Who does that?

Quite opposed to there being no other option for funding except the ESM, there is almost an embarrassment of of them. None of them is a picnic of course, but I would argue that any one of them is preferable to the Fiscal Compact. This post is already too long, but tomorrow let’s play the government’s game and see what other options we have apart from destroying our own economy just to be obliging.

Shed A Tier For Social Justice

Aztec ritual human sacrifice portrayed in the ...
Multi-tier medical systems in history

The €50 charge for the medical card is surely a decoy, on the list purely to make increased prescription costs and bed closures seem more acceptable. Don’t let them away with it. There are ways to save money – or save the euro – that don’t involve ritual human sacrifice. We have a two-tier health system more wasteful than you’d see in any nightmare, even if you regularly dream about inefficient public resource allocation.

Consider a moment: We have to maintain a huge national infrastructure, staffed by public employees with all that entails, and then not let the majority of people use it because they’re not poor enough. Those who don’t qualify are forced into the hands of the profit-making health industry – which we then subsidize by allowing them to use the huge public infrastructure. We’ve basically taken on their capital costs.

This government was elected on the promise of introducing a single-tier health system. OK, they could have got elected on the promise of doing a little dance, but this is the one they made and it’s a highly desirable – in fact a necessary – thing. Problem is, it looks as though they’re employing the simple expedient of killing the lower one off.

How The Euro Exploded, Part 2

Various Euro bills.
Money. It's the root of all ****-ups

Why has the Eurozone gone awry? Why have the economies of Ireland, Greece and – it looks likely – Italy shot off the precipice like runaway trains? Well as in any transport disaster, several things had to go wrong at the same time. Yesterday we looked at Problem one, the credit boom. That was hardly surprising. The next piece of the jigsaw though may be a little more unexpected…

Problem two: The success of the euro. Mad I know, but in many ways the euro crisis was caused by it acting exactly as intended. It immediately improved the economic prospects of the poorer countries of Europe. Well, the poorer ones that were rich enough to join. Currency stability made the ‘peripheral’ economies attractive to money from the richer ‘core’. They became more profitable places to find investment opportunities.

But there were downsides. When a small economy with its own currency enjoys boom times, one immediate consequence is of course inflation. This reduction in the effective purchasing power of the currency generally causes it to drop in value – as if there was a divine law saying the more money you earn, the less it’s worth. But though that’s frustrating, it at least exerts some moderating influence on the economy. It wasn’t long before a strong currency was the very last thing the rapidly-growing peripheral economies of Europe needed. But adjusting it for their sake was out of the question, their interests were secondary at best. The primary goal of the euro, nearly its entire raison d’être indeed, was to be strong. With no possibility of the currency falling it was almost inevitable that these economies would badly overheat.

This was a foreseeable structural problem with the euro. Loosely-attached economies at the fringes were bound to get yanked about violently by the slow but inexorable movements of such a leviathan currency. Yet we still haven’t decided how to deal with it. Had the credit bubble not coincided, we might have had greater time to adjust and put compensating mechanisms in place. But with the bubble and the fluctuation-amplifying mechanism, well, what we got was bursting boilers and third-degree scalding.

And you know what’s the crazy part? With all this turmoil on the bond markets, with all this panic and fear that countries won’t be able to pay their debts, need international aid from the IMF, be forced out of the euro, you might be forgiven for thinking that the euro itself was in trouble. Yet it sails on, imperturbable, as strong as ever. Indeed, many would argue, quite overvalued. Which is really not what you want from the currency that you have enormous debts denominated in.

There is no escaping this: The euro was devised mainly for the benefit of the larger economies, and it is those economies that have benefited most. Yet it is we in the smaller and more vulnerable ones who are being made to suffer for its failings. Here, we’re even expected to return the investments that outside institutions made into our over-inflated property market – the very money that caused it to explode. They want it back.

The enormity of that has still not really sunk in.

How The Euro Exploded, Part 1

Berlusconi-comizio
"I have no idea what I'm doing!"

Italian stock markets rally on rumours that Berlusconi may step down. That says everything really. Usually the forced resignation of a head of government sends the markets plummeting, as a country switches from general predictability into leaderless chaos. But it seems even leaderless chaos would be more relaxing than Silvio Berlusconi. You can actually calculate the millions he’s costing his country every minute he hangs on.

If he does go though, he will be the third national leader directly forced out by the financial crisis. I don’t think there’s been such a wave of regime change across Western Europe since 1968. How did it come to this – and to ask the question that everyone really wants answered, whose fault is it?

You can’t pinpoint a single cause in these things of course, but surprisingly I think we can narrow it down to just three:

Problem one: The credit boom. We’ve spoken of this before, but its origins can be traced back to the liberalisation of the US banking industry, and the creativity this consequently introduced into a previously staid profession. In particular, the creativity about what the term ‘asset’ means.

It’s always been quite acceptable to loan someone some money and then consider their promise to pay you back as an asset you own – as long as the value you give to that asset realistically reflects the risk of them not paying you back at all. Be unrealistic however, and you’re in trouble. Though many complex and obscure mechanisms were applied to the task, I don’t think it’s grossly oversimplifying to say the basic problem was that overvalued loans were used as collateral to raise more money, which was then turned into more overvalued loans, which were used to raise more money, which was… Et voilà, magic money from nowhere. Inevitably this reached the point where it was mutually profitable for everyone involved to overvalue the loans they were all giving to each other.

This free money fountain naturally encouraged borrowing throughout the US and Europe, and indeed about everywhere with access to currency markets. The first I knew something had gone badly wrong was when I got a letter from my bank telling me I’d been ‘pre-approved’ for a loan I hadn’t asked for. I’m a freelance artist for God’s sake. When banks go round pushing loans on poor people, the Emperor is out waving his dangly bits to a cheering audience.

But it wasn’t just private borrowing that got out of control. Countries too found credit temptingly cheap. What’s more, easy credit helped fuel a consumption boom, which upped tax revenues, which encouraged governments to ease off rates and make more promises. The problem is that largely fictitious revenues can dematerialise overnight.  Public borrowings and spending commitments on the other hand are not so easily gotten rid of.

This though merely sets the global scene; in Europe specifically there was further trouble brewing. To follow…