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.

Quantitative Easing

The Bank of England in Threadneedle Street, Lo...
Image via Wikipedia
Ireland’s government is considering making a deeper fiscal adjustment than planned next year in a bid to further distinguish itself from Greece and build on its recent bond market rally. – Reuters

Ah yes. I think they call that “masochism by proxy”. Our government stands ready and willing to show how much we can suffer.

The UK has taken a rather different approach, one not open to us as Euro members. “Quantitative easing” they call it. Sounds like a euphemism for a good solid dump, but it actually disguises something even more unmentionable – what they used to call “printing money”. Of course, they don’t actually print the stuff these days. Who uses cash, darling? Somewhere in some secret turret of the Bank of England, they push a button and simply magic £75 billion into existence.

Doesn’t seem right, does it? If you like, you could think of it as the B of E simply raising its own credit rating and lending itself that £75 billion. But if it’s a loan, who does it have to be paid back to? The future? An alternative universe maybe? I think it’s best to just grit your teeth and accept the reality. Money is fictional. What the B of E has done here is simply made some more up.

Yes, fictional. Money is nothing except what we pretend it is – not even power. Power after all is the ability to make other people do what you want, and money only has that effect if we all play the game, doing what someone else wants in return for mere tokens in the knowledge that other people in their turn will do what we want to get them. If you think about it too much it seems like an utter house of cards. Why do we go along with it – especially we who don’t have so many tokens to begin with?

Well, the only non-fictional way to make people do what they don’t want to do is the threat of direct physical violence. So playing along is preferable to that. Plus it’s hard to see how anyone could be scary enough to organize a whole society through intimidation, certainly not one of any real size.

The other thing that bothers people here is, who owns this £75 billion? Actual wealth like a resource is still there even when it goes unclaimed and unexploited, but money only exists by virtue of someone having it (and someone else wanting it). So when a government just wishes billions into existence, whose exactly are they?

Well the Bank of England gets to spend it, so I guess it’s theirs. What they do though, mostly at least, is immediately use it to buy government bonds. Not from the government, I hasten to add. Modern economics is insane, yes, but it hasn’t quite reached the point where a government invents money to buy the bonds it invented from itself. No, they buy them from people who have invested in them, thereby making those investors’ assets liquid again so that they can spend, spend, spend. Which is good for the economy.

Or so Tories always say when they need to justify the transfer of public funds to private friends.

Will it work? I’m not so sure. When a government makes money up they are unilaterally modifying the rules of the game. Or cheating, as we once called it. This may encourage other people to get creative too. Will markets play fair with the UK government, or will they say that this new stuff just isn’t as good as the old, and they need some more please?

I know where my fictional money is.