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It's a long time since I've seen economic analysts so united in what might be called anger at politicians. Generally speaking, the FT, City AM, Stephanie Flanders and the like realize the realities of the world - that anyone maintaining the belief that some invisible hand meant that markets worked was clearly looking through the history of market balls-ups through very distorting glasses (usually the kind which can always allocate the blame on some kind of regulatory interference, without ever accepting that lack of controls can also lead to equally unsatisfactory imbalance and chaos).
However, this time around, with the Ireland crisis, they have decided that enough is enough. The FT Lex column has noted that it isn't investors who were the dreamers this time round; it was "the central bankers, bureaucrats and politicians". The inclusion of central bankers must have been the most hurtful for the FT, because those are the guys on whom the FT usually relied to talk a bit of economic sense to the politicians who were more worried about keeping the voters happy than about the reality of the situation.
The FT also referred to the "embarrassingly realistic" Austrian finance minister Josef Proell, who put the cat amongst the pigeons when he said this week that Austria's €190m contribution to the December aid tranche to Greece would be paid only if Athens showed it can meet tax-receipt targets. Athens, I assume, didn't actually think earlier this year when it received the bail-out that it would have to keep its promises. The cost of insuring against Greek debt default rose by nearly 100 basis points on Monday, to 9.5% a year.
This Bloomberg chart shows how the benefit that Greek bonds gained from its bail-out have completely disappeared, while Ireland's prospects (as the markets gradually came to realize that the bank "guarantee" was worth the paper it wasn't written on) have declined sharply.
City AM's Allister Heath perhaps played devil's advocate this morning when he said that the Irish financial crisis was a eurozone problem and let them sort it out without any help from us. I'm not sure that I agree with Heath's numbers (in that he seems to think that a 0.5% impact on the UK's GDP isn't that big a deal, whereas I think that it is), but I do agree with his single-sentence summary of the situation — a summary which indicates why many of the Irish population must wonder why they are being punished so badly when they, more than any of the other PIGS, have really made an effort.
You can probably remember the banking crisis in the UK, and the promise made by Ireland at that time, which the then UK Chancellor Alistair Darling (wisely) declined to repeat for the British banking system, despite pressure on him from vote-seeking morons for him so to do. Darling, to his credit, knew that such a promise was meaningless because it could not be fulfilled if needed. I suspect that the Irish government knew this as well, but said it anyway, in the vague hope that by making the promise it would never be called to fulfil it.
But now the banks are really in crisis in Ireland. It is, in effect, the Northern Rock scenario, but for a whole country. And it isn't Mr and Mrs Smith queueing, but corporations. As Irish Life & Permanent quietly revealed yesterday (well, it tried to be quiet about it, but without much success)
It also revealed that "ECB drawings are currently €11.7bn". In other words, €600m was taken out by companies, and to fill that funding, ILP had to go to the ECB. ILP claimed that the situation had "stabilized" since the end of September. Personally, I doubt this.
Allister Heath and David Blanchflower (former BoE monetary policy committee member, now at some University in new Hampshire) both said yesterday that the euro is doomed, in that monetary union either leads to fiscal union, or the monetary union dies. This is now being said in such a matter-of-fact way that even the political dreamers will have to face up to it eventually. Because if they continue to refuse to face up to it, the break-up will be forced upon them via crisis, rather than by plan. The odds are that the break-up will be forced on them by crisis. So the only argument is whether it will be via an exit of the strong or an exit of the weak. The latter would be the least embarrassing, in that Germany could pretend that the currency still existed, even though it would be even more a de facto Deutschmark-by-any-other-name and the next exit from the euro would come as soon as a remaining member country diverged too far from German fiscal policy.
A more embarrassing, but at least more sensible, plan would be an exit of the strong - Germany and France leave, perhaps coming up with a closer alliance that would effectively be fiscal union, and the other countries are left with their own "little euros" that would float against each other (see Danish Kroner, Swedish Kroner and Norwegian Kroner for an example of how this might work).
Stephanie Flanders reserves her ire for German Chancellor Merkel, who, as other commentators have observed, really seems incapable of understanding the mindset of people who work in the markets. I suspect that the corporate exit from the Irish financial system genuinely has her puzzled, because there will be no new funding requirements until next Summer. "Why don't they wait until then?" she must be asking, on the grounds that, like politicians, she assumes that everyone puts everything off until they can't not think about it.
But the markets don't work that way. If they see that their ship is sinking, they aren't going to wait for everyone else to book their place in the lifeboat.
As Flanders wrote, somewhat sympathizing with Irish politicians:
And, in that sense, she is right, not just for Ireland, or for the eurozone, but for the world. As many of us sat there and got richer without noticeably working any harder, we turned back into children, imagining that the wealth came from some kind of magic money tree. But it didn't. We can hardly complain now if we stop getting supplied with free chocolates from that magic money tree. But that's just about stabilizing the situation, not making it better. That's where the big problem comes, because, in effect, we have to give back some of the chocolates that we have received in past years. Except that we have eaten them.
What is so annoying is that there are still people saying and writing that it's all a crisis of confidence. As I wrote here more than two years ago, this is not just a liquidity crisis or a confidence crisis, and anyone who says that, "if we could only believe, then magically things will turn out alright", is basically mad. This is a systemic crisis of insolvency, and the Irish banking system is the first state-wide example of that since Iceland (which in a way was a kind of special case). The worst way to try to cure systemic insolvency is to demand that banks hold more Tier 1 capital in the way of government bonds. That, in fact, will accelerate the collapse.
Now, it IS possible to trade your way out of systemic insolvency -- mainly by changing the insolvency rules and then trading at a profit, and at as big a profit as you can as fast as possible as you can. That entails consuming a lot less, producing a lot more, and persuading someone else to consume the stuff that you make. This, in effect, is the UK master plan. Unfortunately, it won't work (for reasons I have explained before). But the alternatives are too horrible for the public to contemplate, which inevitably means that politicians are too scared to tell them. One alternative solution is that we produce the same and consume much less. But that still requires other people to consume what we produce. If other countries also take this route, then we get into the 1930s depression cycle (producing less and consuming much much less, and then producing much much less and consuming much much much less, etc) , with added new stagflation from QE.
The second alternative is that we produce more and consume much much more. In other words, we solve the problem in the same way that we solved the dotcom-bubble -- create an even bigger bubble. That, in a way, is probably the route down which the world will head -- if only because it puts off the problem until another day (no matter that it doesn't cure the fundamental illness).
There are elements of the prisoner's dilemma in this. If some countries take the "consume much much more" path, then some slimy countries might take the "consume no more and produce more" route (step forward Germany and wannabe Germany the UK). If all countries take the "consume much much less" path, then the self-sufficient countries (the US, China) will benefit, while the commodity countries and trading countries (Brazil, Australia, UK) will suffer.
Except that we have QE2 and low interest rates, which skews things in favour of the commodity countries. So the real sufferers under the "depression" route would be the trading countries and the "value-added" countries, of which the UK and Japan are probably the most well-known.
But none of this is anything the public (and, therefore, the politicians) wants to hear. The people want a solution, but, when you give them the various "solutions", they say that they don't like any of them, so please provide a solution that they like. We shouldn't blame the politicians. We should blame ourselves for our actions or inactions that have permitted such a "candy and chocolates today" system to become the norm.
__________
However, this time around, with the Ireland crisis, they have decided that enough is enough. The FT Lex column has noted that it isn't investors who were the dreamers this time round; it was "the central bankers, bureaucrats and politicians". The inclusion of central bankers must have been the most hurtful for the FT, because those are the guys on whom the FT usually relied to talk a bit of economic sense to the politicians who were more worried about keeping the voters happy than about the reality of the situation.
The FT also referred to the "embarrassingly realistic" Austrian finance minister Josef Proell, who put the cat amongst the pigeons when he said this week that Austria's €190m contribution to the December aid tranche to Greece would be paid only if Athens showed it can meet tax-receipt targets. Athens, I assume, didn't actually think earlier this year when it received the bail-out that it would have to keep its promises. The cost of insuring against Greek debt default rose by nearly 100 basis points on Monday, to 9.5% a year.
This Bloomberg chart shows how the benefit that Greek bonds gained from its bail-out have completely disappeared, while Ireland's prospects (as the markets gradually came to realize that the bank "guarantee" was worth the paper it wasn't written on) have declined sharply.
City AM's Allister Heath perhaps played devil's advocate this morning when he said that the Irish financial crisis was a eurozone problem and let them sort it out without any help from us. I'm not sure that I agree with Heath's numbers (in that he seems to think that a 0.5% impact on the UK's GDP isn't that big a deal, whereas I think that it is), but I do agree with his single-sentence summary of the situation — a summary which indicates why many of the Irish population must wonder why they are being punished so badly when they, more than any of the other PIGS, have really made an effort.
"This is a tragedy, because Ireland has actually sorted out its day to day public finances but stupidly decided to guarantee all of the liabilities of all its banks, something it couldn't possibly afford".
You can probably remember the banking crisis in the UK, and the promise made by Ireland at that time, which the then UK Chancellor Alistair Darling (wisely) declined to repeat for the British banking system, despite pressure on him from vote-seeking morons for him so to do. Darling, to his credit, knew that such a promise was meaningless because it could not be fulfilled if needed. I suspect that the Irish government knew this as well, but said it anyway, in the vague hope that by making the promise it would never be called to fulfil it.
But now the banks are really in crisis in Ireland. It is, in effect, the Northern Rock scenario, but for a whole country. And it isn't Mr and Mrs Smith queueing, but corporations. As Irish Life & Permanent quietly revealed yesterday (well, it tried to be quiet about it, but without much success)
"Corporate deposits reduced from €5.4bn to €4.8bn in the third quarter".
It also revealed that "ECB drawings are currently €11.7bn". In other words, €600m was taken out by companies, and to fill that funding, ILP had to go to the ECB. ILP claimed that the situation had "stabilized" since the end of September. Personally, I doubt this.
Allister Heath and David Blanchflower (former BoE monetary policy committee member, now at some University in new Hampshire) both said yesterday that the euro is doomed, in that monetary union either leads to fiscal union, or the monetary union dies. This is now being said in such a matter-of-fact way that even the political dreamers will have to face up to it eventually. Because if they continue to refuse to face up to it, the break-up will be forced upon them via crisis, rather than by plan. The odds are that the break-up will be forced on them by crisis. So the only argument is whether it will be via an exit of the strong or an exit of the weak. The latter would be the least embarrassing, in that Germany could pretend that the currency still existed, even though it would be even more a de facto Deutschmark-by-any-other-name and the next exit from the euro would come as soon as a remaining member country diverged too far from German fiscal policy.
A more embarrassing, but at least more sensible, plan would be an exit of the strong - Germany and France leave, perhaps coming up with a closer alliance that would effectively be fiscal union, and the other countries are left with their own "little euros" that would float against each other (see Danish Kroner, Swedish Kroner and Norwegian Kroner for an example of how this might work).
Stephanie Flanders reserves her ire for German Chancellor Merkel, who, as other commentators have observed, really seems incapable of understanding the mindset of people who work in the markets. I suspect that the corporate exit from the Irish financial system genuinely has her puzzled, because there will be no new funding requirements until next Summer. "Why don't they wait until then?" she must be asking, on the grounds that, like politicians, she assumes that everyone puts everything off until they can't not think about it.
But the markets don't work that way. If they see that their ship is sinking, they aren't going to wait for everyone else to book their place in the lifeboat.
As Flanders wrote, somewhat sympathizing with Irish politicians:
Admittedly, Flanders concludes with some harsh words:
"The first is that they wouldn't be in this mess - or at least they wouldn't be in this mess right now - if the German chancellor hadn't insisted on leading the rest of Europe into a formal discussion of how sovereign debt in the eurozone might be restructured, in the event of crises after 2013".
"Ireland can't blame [Irish bank's insolvency] on the German chancellor, or any other government. True, the rest of the system was complicit in allowing the liabilities of the Ireland's banking system get so far out of line with the size of its economy. But ultimately, the responsibility for this crisis lies with the Irish themselves. That's a hard pill for ministers to swallow as well."
And, in that sense, she is right, not just for Ireland, or for the eurozone, but for the world. As many of us sat there and got richer without noticeably working any harder, we turned back into children, imagining that the wealth came from some kind of magic money tree. But it didn't. We can hardly complain now if we stop getting supplied with free chocolates from that magic money tree. But that's just about stabilizing the situation, not making it better. That's where the big problem comes, because, in effect, we have to give back some of the chocolates that we have received in past years. Except that we have eaten them.
What is so annoying is that there are still people saying and writing that it's all a crisis of confidence. As I wrote here more than two years ago, this is not just a liquidity crisis or a confidence crisis, and anyone who says that, "if we could only believe, then magically things will turn out alright", is basically mad. This is a systemic crisis of insolvency, and the Irish banking system is the first state-wide example of that since Iceland (which in a way was a kind of special case). The worst way to try to cure systemic insolvency is to demand that banks hold more Tier 1 capital in the way of government bonds. That, in fact, will accelerate the collapse.
Now, it IS possible to trade your way out of systemic insolvency -- mainly by changing the insolvency rules and then trading at a profit, and at as big a profit as you can as fast as possible as you can. That entails consuming a lot less, producing a lot more, and persuading someone else to consume the stuff that you make. This, in effect, is the UK master plan. Unfortunately, it won't work (for reasons I have explained before). But the alternatives are too horrible for the public to contemplate, which inevitably means that politicians are too scared to tell them. One alternative solution is that we produce the same and consume much less. But that still requires other people to consume what we produce. If other countries also take this route, then we get into the 1930s depression cycle (producing less and consuming much much less, and then producing much much less and consuming much much much less, etc) , with added new stagflation from QE.
The second alternative is that we produce more and consume much much more. In other words, we solve the problem in the same way that we solved the dotcom-bubble -- create an even bigger bubble. That, in a way, is probably the route down which the world will head -- if only because it puts off the problem until another day (no matter that it doesn't cure the fundamental illness).
There are elements of the prisoner's dilemma in this. If some countries take the "consume much much more" path, then some slimy countries might take the "consume no more and produce more" route (step forward Germany and wannabe Germany the UK). If all countries take the "consume much much less" path, then the self-sufficient countries (the US, China) will benefit, while the commodity countries and trading countries (Brazil, Australia, UK) will suffer.
Except that we have QE2 and low interest rates, which skews things in favour of the commodity countries. So the real sufferers under the "depression" route would be the trading countries and the "value-added" countries, of which the UK and Japan are probably the most well-known.
But none of this is anything the public (and, therefore, the politicians) wants to hear. The people want a solution, but, when you give them the various "solutions", they say that they don't like any of them, so please provide a solution that they like. We shouldn't blame the politicians. We should blame ourselves for our actions or inactions that have permitted such a "candy and chocolates today" system to become the norm.
__________
