Monday, December 13, 2010
We saw Greece implode. We are hearing more of the same about Ireland. From our perception it would seem Italy and Spain are in even more unsustainable models than the Irish, at least as ill-conceived as the Greeks. What is most troubling is the thought of contagion. Although the domino theory has not been shown to work with nationalist insurrections, they do not become pandemic, just the opposite might prove true with nationalist banking crises. The financiers are more interconnected transnationally than the revolutionaries. It goes to figure that elite institutions would be more likely to have international webs weaved than the proletariat.
That being said then, it is all the more urgent that this banking crisis be contained. Barry Eichengreen, Professor of Economics and Political Science at the UC, Berkeley argues just the opposite is happening,
"The Irish “rescue package” finalized over the weekend is a disaster...The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent...Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year. This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable...Nor is the situation economically sustainable. Ireland is told to reduce wages and costs...[this is] the phenomenon of “debt deflation” about which the Yale economist Irving Fisher wrote in a famous article at the nadir of the Great Depression.Well dang, if that doesn't just sound a little scary. Read the whole piece here.
One can interpret the intransigence of the [EU] in two ways. First, they understand neither economics nor politics. As Talleyrand said of the Bourbons, “They have learned nothing, and they have forgotten nothing.”
Alternatively, policy makers in Germany – and in France and Britain – are scared to death over what Ireland restructuring its bank debt would do to their own banking systems. If so, the appropriate response is not to lend to Ireland – to pile yet more debt on the country’s existing debt – but to properly capitalize their own banking systems so that the latter can withstand the inevitable Irish restructuring.
But European officials are scared to death not just by their banks but by their publics, who don’t want to hear that public money is required for bank recapitalization. It’s safer, in their view, to kick the can down the road in the hope that something good will turn up – to rely on “the luck of the Irish.”
As John Maynard Keynes – who knew about matters like reparations – once said, leadership involves “ruthless truth telling..."