Whose Is The Moral Hazard?

If you’re wondering what the Irish debt crisis – and indeed the Euro crisis as a whole – is all about, you could do worse than read this opinion piece, a passionate but clear denunciation of how we are being exploited from independent TD Stephen Donnelly. I wouldn’t have put as much emphasis on the public pay deal, but that aside he puts it so well that it’s hardly worth my while writing about it.

I’ll quote him extensively instead… (Emphasis mine)

The bonds¹ were bought from Anglo and INBS in 2007, at the height of the property bubble. They offered higher profits than buying Government bonds, as they didn’t come with a Government guarantee. If the people buying these bonds did their homework, they would have noticed that Anglo and INBS were massively exposed to the Irish property market. They will have read the IMF‘s warning of the “possibility of an abrupt unwinding of the housing boom”. They would have known that the higher potential profits offered by Anglo and INBS came with the clear possibility of losses. Indeed, some of the bonds will have been sold on by the original purchasers at a loss. When this happened, the European financial system did not collapse, the ATMs did not stop working. This week their gamble pays off. Yet again the Ferrari showrooms in London, New York and Tokyo will toast the Irish.

A commemorative Ulster Bank note. The other si...
Looking back, perhaps there were signs

In a massive irony, the ATMs did stop working this week – though at Ulster Bank, the largest operator here the government didn’t have to buy. It turned out to be due to a software update cock-up and not a bank run, but you know what? People dealt with it. Screaming crowds didn’t surge down the streets, horses didn’t start eating each other. Yet that was the scenario the banks used to frighten ministers into nationalising the liabilities of their profit-drunk industry. They bluffed us.

Donnelly continues:

This comes at an enormous human cost. Recently, the HSE told the parents of disabled young adults in Wicklow that there was no longer any money to fund rehabilitative training for their children. […] But we’ll find the €1.1bn [to pay these investors], and we’ll pay the €40m every year in interest. As of last Monday, there were 19 young adults in this situation in the Dublin/Mid-Leinster region. The €40m would pay for their training for the next 150 years.

The Government has reduced welfare payments to single parents, cut support to the disabled, removed staff from Deis² schools and introduced regressive charges. At the same time it incurs enormous interest payments to cover the losses of private sector investors who knew they were betting on a risky venture.

And who knew, what is more, that their reckless lending was fuelling a destructive property bubble. In 2007, they were clearly out to grab a quick profit off a boom. To use a term from the housing market that you don’t hear so much anymore, they were out to “flip” our economy.

They flipped it all right. Those flippers flipped it good.

And this week we reward them for it, with a further €1.1 billion. Money that decent non-gambling taxpayers will work for years if not generations to repay, while the vulnerable in our country have their lives stolen. Whose exactly is the moral hazard here?

 

  1. Bonds which our government is paying this week, even though they were owed by private financial  institutions that went bankrupt.
  2. Equal-opportunity.

George Soros: Blame Merkel

DAVOS/SWITZERLAND, 27JAN10 - George Soros, Cha...

George Soros knows money. A student of the great philosopher Karl Popper, he has become one of the most vocal critics of modern economics and capitalism. But he doesn’t just talk about the failings of the financial markets. He uses his insight to make a quite seriously incredible amount of cash from them. Out of this, he gives billions to worthy causes. A guy with an opinion worth hearing then.

So when, speaking at the Economics Festival in Trento, he lays responsibility for the Eurozone crisis squarely at Chancellor Merkel‘s feet, you sit up and take notice.

In a nutshell:

The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. […] It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.

In other words, people lent cheaply to Eurozone banks and governments because they believed that there was zero risk of a Eurozone country being allowed to default. But after Lehman, Merkel – unilaterally – declared that Eurozone countries would have to support their own banks. Markets eventually realised this implied that Eurozone countries might have to default, and so lending costs to them shot up – just when we needed to borrow in order to support our banks! It was a single, immensely short-sighted decision of Merkel’s administration that precipitated our current situation.

And their continuing failure to respond adequately is turning a crisis into a disaster for the EU:

Just as in the 1980’s [Third World debt crisis] all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged.  Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe.

He does more than just lay blame of course. The power to save the situation, he argues, is also in the hands of the creditor nations. But it won’t be easy:

The German public cannot understand why a policy of structural reforms and fiscal austerity that worked for Germany a decade ago will not work Europe today. Germany then could enjoy an export led recovery but the eurozone today is caught in a deflationary debt trap. The German public does not see any deflation at home; on the contrary, wages are rising and there are vacancies for skilled jobs which are eagerly snapped up by immigrants from other European countries. Reluctance to invest abroad and the influx of flight capital are fueling a real estate boom. Exports may be slowing but employment is still rising. In these circumstances it would require an extraordinary effort by the German government to convince the German public to embrace the extraordinary measures that would be necessary to reverse the current trend. And they have only a three months’ window in which to do it.

We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be. The future of Europe depends on it.

Three months, to get the EU back on the track of being a positive, voluntary association of nations. If we can’t do that, then the choice we’re faced with is basically between effective German control of an impoverished continent, or the sudden and messy disintegration of the Euro. So… We’d better find a solution to this thing. Stat.

I urge everyone to read the speech in its entirety, though if you’re in a rush The Journal.ie has a good summary.

Burning Our Future To Fuel The Past

The panel of Why You Should Vote No!, a discussion organised by the Campaign Against the Austerity Treaty in Galway.  Big budget stuff this ain’t.

Well the optimism of Tuesday has been smartly kneed in the crotch. I will still apply for the course, but any hope of actually being able to do it without starving to death is rapidly receding. There is basically no money now to help people do postgraduate studies. No wait, I tell a lie. The exception is postgraduate-level teacher training. There is no funding to employ teachers of course, but you can still train to be one.

Since the last budget there will be no further grants or other maintenance aid for students continuing to the fourth level. So much for the knowledge-based economy. Austerity trumps that, like it’s trumped every other strategy and aspiration.

And this is just a taster. The government plans something like a further eight percent in cuts next year to meet borrowing reduction plans. Where will this come from? It’s hard to say. We’re already cutting deeply into the things, like education, that led to our economic growth in the past. Sure, I can get by without investment in myself to improve my earning opportunities. But the country as a whole?

We’re burning the future to fuel the past. Whatever cuts we make further affect our opportunities to recover and so reduce our ability to pay off our debts. They’re essentially counter-productive, and it goes without saying that they will also cause real harm to real people as health, welfare, pensions and services come under increasing pressure. The more we cut, the worse lives become, and the longer it’s going to stay that way.

But note that I’m talking about the government’s current plan. This is without taking the Fiscal Compact into account. If we pass that, we will be committing ourselves to repay debts at a significantly faster pace than the government apparently thinks possible right now. They accuse the No campaign of offering no alternative strategy, without even beginning to attempt to explain how we can meet the criteria the Fiscal Compact sets for us.

The truth is, we simple cannot meet those criteria. How much more will we have to cut back compared to current reductions? Nearly twice as much. Who believes for a moment that’s possible humanely, never mind politically?

But wait, what’s politically possible doesn’t matter any more! Because the treaty provides that if we are too merciful on our own population and fail to cut deeply enough, the Eurozone will be able to impose budgets on us – essentially turning our democracy into a puppet administration. And as this outcome seems pretty much inevitable, voting for the treaty really is voting to wind up Ireland as a meaningful state. You think a foreign administration we can never vote out can’t do a worse job than our own shower? I invite you to consider how that worked out in the Great Famine.

I do believe that we’ll need some sort of budget management agreement if – an increasingly big if – we continue to have a common currency. But the one we’re being asked to swallow puts the interests of the larger Eurozone economies so completely before our own that it amounts to tyranny. For their sake we are being asked to take actions that run absolutely counter to our most urgent needs.

This is an anti-overspending compact just when we desperately need to spend. It exists because other countries overspent in the past, not us. Compared to the European average we underspent. Compared to Germany and France, we were choirboys. Our problem was that we took too little tax from far too few people, creating a tax base that was utterly, idiotically dependent on the boom. We need more tax income, desperately. Slowing down the economy instead – and so further reducing the tax base – is fighting fire with ostriches. It’s insanity.

But the larger countries do not give a damn because they have their own problems. All the really care about is that the Euro doesn’t fall in value, because basically that’s what their wealth is in. There are no two ways about this. We are being asked to sacrifice ourselves – really, do something quite suicidal –  in order to be a bulwark for the Euro. Our reward for this? The right to apply for loans we may or may not need, at rates that may or may not be better than we can get elsewhere, from a fund that we have no guarantee is ever going to exist.

Are we fucking mad?