What is truth?

Archive for November, 2010

Two days closed

After two days of having the kids at home and no school I hope we don’t get to hear that they have to stay home again the DeLaSalle should be opened tomorrow as of today I did not see any need to keep the school closed.

 

By 15.30 today the snow in Wicklow town had mostly gone in the town centre however in the outline estates the ice and snow stayed put

Ireland needs a Wikileaks of its own

The latest Wikileaks revelations are nothing new and will not damage international diplomacy, according to major world leaders.  So the question then we should ask is why are these same world leaders calling for “Action to be taken against Wikileaks .

Here in Ireland we desperately need a Wikileaks to show the still 18% of the population that still support the gangsters Fianna Fail Government just what crooks there really are.

Do you know something the public should know ? why not tell us and we will tell the world

Changing Anglo Irish Banks Name

Anglo Irish Bank Corporation (Anglo) is to change its name within weeks, pass its deposit book which was worth €33bn in June 2010 (or indeed sell? why not, after all if Anglo is paying depositors from 1.5% and given the cost and difficulties in accessing money market funding, the deposits might have some value) and will rebrand its €38bn residual loan book under a different name which according to Anglo Chairman, Alan Dukes speaking on RTE radio this morning, will be run down over a period of years.

It seems from Irish Times reporting that Anglo’s loanbook will “conceivably” be combined with INBS’s loanbook and that there is to be a v4.0 restructuring plan (v1.0 in November 2009 was rejected out of hand by the EC, v2.0 in May 2010 was rejected in early September 2010 despite Brian Lenihan making personal entreaties to Competition Commissioner Joaquin Almunia in Brussels and v3.0 was reportedly submitted to the EC “the last week of October 2010” – let’s hope v4.0 is a charmer!).

The media seemed obsessed yesterday with the change of name as if taking a sledgehammer to the signs on the bank building will obliterate the toxicity of the loans and derivatives that will remain in the rebranded bank (€38bn alone from Anglo).
Despite the flurry of activity with Anglo in the last couple of days, that bank did not feature in the awkwardly-worded release from the Central Bank on Sunday night which accompanied the announcement of the bailout. The press release dealt with Allied Irish Banks (AIB), Bank of Ireland (BoI), EBS and Irish Life and Permanent (ILP – parent to Permanent TSB) and announced a further €10bn injection into these four financial institutions – €8bn in capital injections and a further €2bn in “early measures to support deleveraging” – a total of €10bn. The wider bailout announcement made clear that another €25bn would be available as a contingency.
Of the €8bn in capital injections, €5.265bn is to go to AIB, €2.199bn to BoI, €0.438bn to EBS and €0.098bn to ILP which will lead to all four institutions having a Core Tier 1 capital cover of 12.5-14.0%. AIB, BoI and EBS have another three months to 28th February, 2011 and ILP has six months to 31st May, 2011, to put the additional capital in place. At this stage it is not clear to what extent the State will need make up to €8bn available and to what extent the capital can be raised privately through a rights issue or disposal of assets. There was no indication which banks would be the beneficiaries of the €2bn in “deleveraging support”
The announcement from the Central Bank was dreadful in that there was little information or rationale for the details in the announcement which also announced that AIB and BoI would now transfer €0-20bn land and development loan exposures to NAMA, a volteface on the decision announced on 30th September, 2010 to allow those two banks to keep €5-20m exposures because it was more “effective and efficient”. Why is AIB’s Core Tier 1 capital to go to 14%? How safe are credit unions in the State which are to be subjected to stricter rules in 2011 – “A significant strengthening of the regulation and stability of the credit union sector will be carried out by end-2011.” And in the interview with Governor of the Central Bank on RTE yesterday, of course no-one asked for a rationale though it seems that Patrick himself wasn’t in favour of the capital injections.

Bizarre and confused and doesn’t inspire confidence.
And speaking of inspiring confidence, it seems that after the Prudential Capital Assessment Review announced in March 2010 and updated in September 2010, there is to be another PCAR undertaken by 31st March 2011 and this time there will be a review of loan provisions by (a) the Central Bank and (b) an “independent third party”– you’d have to ask if that is to be the same unidentified “independent consultants” which informed the predicted loss levels on 30th September, 2010. It was disappointing in the extreme to hear the Financial Regulator, Matthew Elderfield, last week outline future examination of non-NAMA loans at the banks at a “granular level” – why the blazes has this not happened already? NAMA uncovered atrocious lending practices and documentation on a loan-by-loan basis, why has this regime of independently verifying non-NAMA loans not already taken place?

The Irish Times today reports that an “independent assessment of the new financial regulator will also take place to ensure that international best practice is being followed”.
The immediate reaction of the stock market to the announcement on Sunday night was very positive – shares in the three State-guaranteed banks not in 100% State-ownership recorded major gains yesterday with Allied Irish Banks up €0.02 (6%) to €0.362, Bank of Ireland up €0.05 (17%) to €0.31 and Irish Life and Permanent up €0.30 (58%) at €0.81. The markets seem to have formed the view that ILP will be able to raise its own capital by May 2011 without recourse to the State which might have brought that institution into majority State control.
So where does the announcement on Sunday leave the six State-guaranteed banks?
(1) AIB – still 18.6% State-owned today and likely to be 100% nationalised
(2) BoI – still 36.5% State-owned today and if the €2.199bn is to come from the State, the State will own over 70% of BoI. If the €214m preference share dividend due by BoI to the NPRF in February 2011 is paid in ordinary shares then the State share will increase to nearly 80%
(3) EBS – presently 100% owned by the State but offered for sale with two final bidders (a) ILP and (b) Cardinal Consortium with rumblings that ILP may have to drop out
(4) INBS – 100% state owned, deposits likely to move to new bank in association with Anglo, loans to be run down over time
(5) Anglo – 100% state owned, deposits likely to move to new bank in association with INBS, loans to be run down over time.

source http://namawinelake.wordpress.com/

Pearls of wisdom from Paul Maher

25 years ago, Garret said :
Get off your ass,
Pick up your shovel,
Get on your camel,
I will lead you to the Promised Land.
 
5 years ago, Bertie said :
Put down your shovel,
Sit on your ass,
Light up a Camel,
This is the Promised Land.
 
Today Biffo will :
Kick your ass,
Tax your shovel,
Sell your camel,
And tell you,
There is no Promised Land.
 
Paul Maher, Roscrea, Co.Tipperary

Iceland elects ordinary folk to draft constitution

 

YAHOO NEWS

By ALDA SIGMUNDSDOTTIR, Associated Press Alda Sigmundsdottir, Associated Press – Fri Nov 26, 8:52 am ET
REYKJAVIK, Iceland – Iceland’s getting a new constitution — and it’s really going to be the voice of the people.

The sparsely-populated volcanic island is holding an unusual election Saturday to select ordinary citizens to cobble together a new charter, an exercise in direct democracy born out of the outrage and soul-searching that followed the nation’s economic meltdown.

Hundreds of people are vying for the chance to be among up to 31 people who will form the Constitutional Assembly slated to convene early next year — a source of huge pride for Icelanders who have seen their egos take a beating in recent years.

“This is the first time in the history of the world that a nation’s constitution is reviewed in such a way, by direct democratic process,” says Berghildur Erla Bergthorsdottir, spokeswoman for the committee entrusted with organizing the Constitutional Assembly.

Iceland has never written its own constitution. After gaining independence from Denmark in 1944, it took the Danish constitution, amended a few clauses to state that it was now an independent republic, and substituted the word ‘president’ for ‘king.’ A comprehensive review of the constitution has been on the agenda ever since.

Pressure mounted for action after the nation’s economic collapse in 2008, an event punctuated by ordinary citizens gathering outside the Althingi, the parliament, banging pots, pans and barrels — a loud, clanging expression of fury. The meltdown was seen not only as a failure of the economy but of the system of government and regulatory agencies. Many came to believe a tighter constitutional framework — including a clearer division of powers — might have been able to minimize that damage, or even prevent it.

“It is very important for ordinary citizens, who have no direct interest in maintaining the status quo, to take part in a constitutional review,” said Prime Minister Johanna Sigurdardottir. “We are hoping this new constitution will be a new social covenant leading to reconstruction and reconciliation, and for that to happen, the entire nation needs to be involved.”

The election marks yet another twist in the fortunes of this Nordic nation of just 320,000 that went from economic marvel to fiscal basket-case almost overnight. The rugged island settled by Vikings was transformed from a country of fisherman to hub of international finance with dizzying speed. Icelandic investors — dubbed ‘Viking raiders’ — snapped up assets around the world for a decade, mostly on borrowed funds.

The global financial crisis wreaked political and economic havoc in Iceland. Banks collapsed in October 2008, and with them the Icelandic currency, the krona. Unemployment soared, as did the cost of living. Loans issued in foreign currencies during the boom suddenly doubled, tripled or even quadrupled, all due to the collapse of the krona.

Icelanders debated their values and turned to questioning the foundations of their society, including those that had facilitated the boom. Anger grew as more instances of misdeeds and incompetence in the private and public sector were exposed. Icelanders woke up to the harsh fact that their country, which had consistently been at or near the top of the Transparency International anti-corruption index, was, in fact, steeped in corruption.

That was ultimately confirmed in a 2,000-page report following a special parliamentary investigation. That report showed that the foundations of Icelandic society were decayed and that a sweeping revision of the social framework was needed.

Sigurdardottir says a new social covenant can at least assist in “restoring the public’s faith in the government.”

The constitutional assembly will be made up of 25 to 31 delegates, the final number to be determined by a gender and equality ratio. It will be made up of regular citizens elected by direct personal voting. Anyone is eligible to stand for election, with the exceptions of the president, lawmakers and the committee appointed to organize the assembly.

The assembly will draft a proposed new constitution next year. They will use material from another extraordinary project earlier this year in which 1,000 randomly chosen Icelanders — aged 18-89 — offered their views on what should be in the constitution.

Now the race is on to be among the charter’s authors, with 523 people in the running. Truck drivers, university professors, lawyers, journalists and computer geeks are all among the candidates. All have been given equal air time on Icelandic radio to make their platforms known.

Those elected will receive a salary equal to that of Iceland’s lawmakers while the constitutional review takes place, and Icelandic employers are legally obliged to grant leave to any employees elected to the assembly.

One candidate, Thorvaldur Gylfason, a professor of economics at the University of Iceland, drew parallels between Iceland and South Africa, saying that a country that has experienced shock needs a fresh start.

“A country that has suffered a complete economic and moral collapse needs to start with a clean slate,” he said. “We need to ensure that the sort of malpractice and negligence that, among other things, led to the collapse of the Icelandic economy two years ago, cannot happen again.”

Not everyone is convinced that the constitution should be amended, and some view the process as a frivolous populist exercise. They cite the high cost of the assembly and the difficulty of adequately presenting all the candidates.

Thorsteinn Arnalds, an engineer, is running in hopes of keeping the existing constitution intact, arguing that change in a time of crisis is preposterous.

“The constitution had nothing to do with the bank collapse, and it is not standing in the way of rebuilding,” he said. “Right now we need the basic social structures in place, not for them to be torn down.”

Others, like Berglind Steinsdottir, a proofreader and student, are more enthusiastic.

“I am incredibly optimistic and excited about seeing what comes out of this,” Steinsdottir said.

By ALDA SIGMUNDSDOTTIR, Associated Press Alda Sigmundsdottir, Associated Press – Fri Nov 26, 8:52 am ET

YAHOO NEWS

Bailouts Are Not Working!

The European authorities had hoped that, as soon as their massive, supposedly “definitive” Irish bailout package was announced, investors would jump for joy. Instead, investors have done precisely the opposite.

The authorities had hoped that the premiums on government bond default insurance would come down dramatically. Instead, the premiums have gone higher, as I’ve just shown you.

The authorities had hoped that Irish bond yields would come down sharply, helping to avert a disastrous, additional interest burden for the government. Instead, bond investors have dumped Irish bonds with both hands, driving their prices down and yields up.

Exactly seven days ago, on the morning after the big bailout announcement, the yield on Ireland’s benchmark 10-year government bond was near 8 percent. Now, it has surged by more than a full percentage point to 9.17 percent. That extra interest cost alone threatens to eat up a big chunk of the bailout money.

The authorities had hoped — and prayed — that their earlier bailout of Greece would have been enough to contain the cancer. Instead, it has metastasized and spread — not only to Ireland, but also to Spain and Portugal.

Right now, the cost of insuring against a default on Spanish and Portuguese bonds is at new, all-time highs, far surpassing the levels reached earlier this year when the Greek debt crisis was first exploding.

Even Greece itself, which the authorities thought was largely cured, is back in the emergency room.

But this time, all life support systems are in serious doubt. And this time, investors are in open rebellion against the spin doctors.

The facts: At the height of the last Greek debt crisis — on February 8, 2010, to be exact — the cost of insuring a €10 million 5-year Greek government bond reached a peak of €420,855.

But last week, the cost on the exact same instrument had surged above €1,000,000!

That’s like shelling out an outrageous $50,000 for a term life insurance policy that pays no more than $500,000 in death benefits.

Why so expensive? Because investors now realize that austerity, no matter how necessary, can never be a quick ticket to fiscal balance.

In fact, the more the Greek government has cut spending, the more its economy has sunk. Ditto for Ireland and other countries.

Urgent Lessons for All U.S. Investors

Even if you’ve never invested a penny in Europe — and even if you’ve never set foot outside the United States — this new phase of the debt crisis has far-reaching implications and lessons for you and your family …

Lesson #1 America Is Definitely NOT Immune to the Contagion

For 2011, the Bank for International Settlements estimates that Portugal’s and Spain’s government debts will be 99 percent and 78 percent of GDP, respectively.

But for the same year, U.S. government debts will be 91 percent of GDP.

Thus, by this measure, America’s debt burden is similar to

Portugal’s and bigger than Spain’s — two countries that are ALREADY victims of the sovereign debt crisis.

Yes, the U.S. dollar is the world’s reserve currency.

And, yes, that gives Washington the ability to print money with impunity … press other rich countries to accept its debts … and borrow huge amounts abroad to finance its deficits.

But that’s more of a curse than a blessing!

It means that, more so than any other major nation on the planet, the U.S. government is beholden to investors overseas — often the same investors who have repeatedly attacked Greece and Ireland this year.

Ultimately, that could make the U.S. even more vulnerable than Europe.

Lesson #2 Governments CANNOT End a Debt Crisis by Piling on Still MORE Debt Europe tried by announcing a Greek bailout earlier this year … and it failed miserably.

Europe tried again by expanding the Greek bailout to a $1 trillion fund for all euro-zone countries. But that effort is also failing. In fact, just one more bailout — for Spain — could wipe out the fund.

And now, even before Europe has figured out precisely how the bailout fund is to be used, there was new talk in high circles this weekend of expanding it even further — another desperate attempt to “reassure investors.”

But again, it is not working.

In fact, the more money Europe throws at the crisis, the more investors seem to recoil in horror.

Investors can now see, as plain as day, how past rescues have backfired.

They can see how the debt disasters can’t be papered over with bailouts or printed money.

And they KNOW that money printing can only gut the currency they’re investing in — be it the dollar or the euro!

In either case — bailout or no bailout — bond investors want out.

Lesson #3 Before a Government Debt Crisis Can Be Ended, It Must FIRST Get a Lot WORSE!

In order to slash deficits …

  • Governments must impose austerity — deep cutbacks in spending, tax hikes, or both …
  • The austerity inevitably drives the economy into a tailspin, and …
  • The economic tailspin always causes even LARGER deficits!

It’s only after years of fiscal discipline and collective belt-tightening that this vicious cycle is ended and balance is restored.

That’s why the cutbacks in Greece, Ireland, Portugal, and Spain are, in the near term, making the crisis even worse. And it’s also why a similar vicious cycle is now looming in the U.S., as the new Congress seeks to slash the deficit.

Lesson #4 The Great Debt Crisis Of 2008 Never Ended!

Politicians talk about the U.S. debt crisis of 2008 … the Detroit bankruptcy crisis of 2009 … the European sovereign debt crisis of early 2010 … the Greek debt tragedy … the Irish debt mess … the California budget debacle … the U.S. municipal bond collapse … and more.

Then, they talk about the urgent need to make a show of resolve to bail out the world — to stop the “contagion” from spreading from one sector or region to the next.

But these are not separate, isolated disasters. Nor is the contagion of fear the true source of the problem.

Instead, what we are experiencing is one, single, integral debt crisis that never ended.

It is one crisis that has spread from the U.S. to Europe and beyond … morphed from a private-sector banking crisis to a public-sector government debt crisis … grown in scope and power … and begun to drive the large debtor nations on a collision course beyond anyone’s control.

Lesson #5 The New Phase of the Debt Crisis Can Bring Surging Interest Rates

I showed you how the yields on Ireland’s 10-year notes have surged from 8 to 9.17 percent in just a few days. Yields in other European nations have shot up as well.

Meanwhile, I assume you’ve seen how, despite the Fed’s massive bond purchases, U.S. Treasury yields have also moved higher.

And you’ve seen even bigger jumps in U.S. municipal bond yields.

This is just the beginning.

source http://www.marketoracle.co.uk/Article24628.html

Dermot Ahern to go

Dermot Ahern, TD, Minister for Justice of Ireland

Image via Wikipedia

Minister for Justice Dermot Ahern said this morning he will not contest his Dáil seat in Co Louth at the next general election for health reasons.

In a statement released this morning, the Fianna Fáil Minister said in the last 18 months he has been “diagnosed with a painful medical condition necessitating heavy medication” and has been advised to change the pace of his life.

“There is never a good time to make a decision like this. I do so in the knowledge that there are many people in the party who will now be able to take up the battle and to represent Fianna Fáil in the best traditions of the party in this constituency,” he said.

Mr Ahern, who is a solicitor by profession, has served as a public representative since 1979. He was first elected to Dáil Éireann in 1987 and retained his seat ever since.

During his career he has held the justice, foreign affairs, communications, social and family affairs portfolios and has served as government chief whip.

“I believe in the upcoming generation; well educated, energetic and enthusiastic. I believe they deserve the opportunity to contribute,” he said in his statement. “As a nation we face major challenges. I firmly believe in the spirit and resilience of our people. I believe in our country.”

Mr Ahern later revealed he has been suffering from rheumatoid arthritis and made the decision to step down following the 2007 election. He said he informed the Taoiseach of his intention in October last year. He confirmed it this weekend and before informing his Cabinet colleagues this morning.

The other TDs in the Louth constituency at present are Mr Ahern’s party colleague, Ceann Comhairle Seamus Kirk; Sinn Féin’s Arthur Morgan; and Fine Gael’s Fergus O’Dowd.

Mr Morgan recently announced plans to step down at the next election, with Sinn Féin president Gerry Adams set to contest the seat in his place.

Speaking on RTÉ’s Today with Pat Kenny,  he said he has been advised to reduce the pace of his life.

“I canvassed in Donegal and I physically was not able to move after one days canvassing because of the pain. That is something I am going to have to live with but I’m told if I am to have any chance of that dissipating obviously my pace of life has to change somewhat.”

Mr Ahern said his decision had nothing to do with Mr Adams contesting the Louth constituency in the next election. “I’ve been in politics for 24 years, I’ve fought some very tough battles, I have no fear of Gerry Adams or no-one else.”

He said while he felt Mr Adams will get elected there would be a “significant ABA (anyone but Adams)” vote in the area and that the idea of “parachuting someone in from outside the constituency in this day and age is an abomination”.

Mr Ahern said he would be extremely interested in doing some work in or associated with the third world in the future.

Comment :

You have got to be joking you and your other gangsters in the Dail have just plunged our country into the 5th world status ,none of the so called  third world countries  have debts as big as ours and I suppose you expect to walk away with a big send off and a fat pension I hope the Irish people in the next Dail will slash your pension down to the nation pension and hopefully you along with the other crooks that are now running for cover will have to every year, worry about paying you bills like the millions of people all around the country because of your incompetence and arrogance

Get going and don’t come back I say!

Contagion goes large

Blaming speculators is the last refuge of the desperate, so it is no surprise to find Europe’s leading politicians holding markets responsible for their problems. James Mackintosh, investment editor, says markets can get it wrong – but complaints from politicians are a pretty good sell signal. 

Sample Letters from the Irish Times

Bailout package for Ireland

Madam, – Congratulations to the Government on negotiating the terms of the “national recovery fund” in the national interest. What a pity it is the German national interest rather than ours. – Yours, etc,

SEAMUS WALSH,

Kingsford,

Barntown,

Wexford.

Madam, – This is not an €85 billion bailout, it is a €67.5 billion mortgage that our zombie Government has signed up for.

It is an old-style mortgage (a type not much in favour during the boom years), where Mother Ireland has been forced to deposit €17.5 billion of her cash reserves in order to obtain 30 pieces of silver from our IMF/ECB masters.

Has it come to this pass, that the risk-taking bondholders lose not one cent for their recklessness, while the citizens of Ireland, most especially the Irish poor, pay dearly in this new “age of austerity”. Surely this is socialism for the rich and capitalism for the poor? To misquote Scotland’s great bard Robbie Burns; “I make this declaration, that we’re bought and we’re sold for European gold, such a parcel of rogues in a nation”! – Yours, etc,

PAT BURKE,

Ashlawn Park,

Ballybrack,

Dún Laoghaire/Rathdown,

Co Dublin.

Madam, – According to the Government, the combined annual average interest rate will be of the order of 5.8 per cent per annum. If we exclude the State’s contribution of €17.5 billion which is interest-free then the average interest rate on the borrowed €67.5 billion rises to 7.3 per cent.

If correct, this rate assumes an even chance of Ireland defaulting on the loans. What is the point of the bailout if there is such a high risk of failure? – Yours, etc,

BRIAN FLANAGAN,

Ardmeen Park,

Blackrock,

Co Dublin.

Madam, – With the announcement of such a punitive interest rate on the so-called “bailout” funds, the EU authorities have hammered the final nail into the coffin of the European project. So much for solidarity! Throughout my life I have been a committed supporter of the European integration and the EU.

No more! – Yours, etc,

Rev JOHN SCOTT,

Rathdowney,

Rosslare,

Co Wexford.

Madam, – When European banks were lending recklessly we, like others, failed to regulate the banks operating in our territory. For this we must serve our 300 years on the Sea of Moyle.

But our European neighbours are not lending so that we can bail out our banks. They are lending so that we can bail out theirs. In a just world, lender and borrower would split responsibility fairly and the taxpayers of the EU would pay for their own failures. Instead, the strong are loading the entire burden onto the shoulders of the weak. They now own our Government and they will soon confiscate our resources when we fail to pay them their pound of flesh. What the British failed to do with a succession of armies, European officials are about to achieve with a piece of paper and a pen.

It is time to stop fighting each other and start fighting back.

Per capita, we are the richest people in the world. We are sitting on a crock of gold that keeps filling no matter how much we take from it. We have what Europe desperately needs: energy.

Here’s the deal. We take the bailout money and offer the bondholders 20 per cent now or 100 per cent in 20 years. With the balance we build offshore wind farms to supply Europe with as much electricity as we can make and we manufacture the equipment here. Everyone is a winner. The Europeans get secure energy. The bondholders get secure investment. We get immediate employment, permanent income and we keep ownership of our resources. – Yours, etc,

BRIAN WALL,

Bibliovista,

Glengarriff, Co Cork.

Madam, Winston Churchill once said, “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” He was right then and he’s right now. – Yours, etc,

MARIE GALLAGHER,

Park Avenue,

Blackrock, Co Dublin.

Madam, – It is inconceivable that Government “poker players” would negotiate a deal with the ECB/IMF that would better favour Irish taxpayers knowing that a new government will shortly be in power to clean up the mess left by the current administration. This deal has more to do with Fianna Fáil’s long-term interest than the national interest. Shameful. – Yours, etc,

PJ Mc DERMOTT,

Sheeaune,

Westport,

Co Mayo.

Ronan Lyons on “Ireland’s Economic Crisis”

Ronan Lyons has posted a new item, ‘Ireland’s Economic Crisis: What sort of hole
are we in and how do we get out?’

The full story of Ireland’s economic highs and lows over the past generation will no doubt be examined in many books for years to come. That’s no consolation, however, for people who are voting in a few weeks and who want to know where we are and what we need to do. They want to know which painful hits they should take, and which they shouldn’t. To know what to do next, we need to know how we got here and how bad things are, so this post aims to give a bare-bones outline of how Ireland dug itself into a hole, how deep the hole is and the kind of things we need to do to get back out of the hole.

Digging the hole: Five mistakes in Irish policy

Irish policymakers essentially made five major mistakes over the past fifteen years. The first four can be grouped largely under the heading of: “We just didn’t prepare for life in the eurozone”. While we prepared for entering into the eurozone, we didn’t prepare for when we were actually in the eurozone. Specifically, when you’re in a currency union, you don’t have your two main tools for stabilising the economy – interest rates and exchange rates.

You may wonder, then: why on earth would you enter a currency union? Those who took out mortgages in the 1980s can confirm that Ireland was plagued by high and volatile interest rates, something you escape in a large currency union. Secondly, having your own exchange rate means you can be picked on by the markets. So Ireland made a trade: we gave up our two primary tools for stabilising the economy, in return for life in a eurozone of low and stable interest rates and a stable currency.

But if you do that, your main tool for smoothing the ups and downs of the economic cycle becomes your fiscal policy – what the Government taxes and spends. You keep some gas in the tank, so to speak, so when a recession hits, you can crank up spending. Unfortunately, as the first two mistakes point out, it seems the Government is only learning that lesson now.

  1. Government Spending: Do you run your household finances according to the principle, “When I have money, I spend it – when I don’t, I won’t”? Almost certainly not, I would say. You borrow and save to smooth out your consumption over time. And what holds for a household is true for a country. The government, however adopted a principle of “Spend when we have it” in the late 1990s and total spending increased from €27bn in 1998 – increased spending by an average of 10% a year, until gross spending topped €76bn in 2008. Clearly, if you increase spending at that speed, the focus and quality of your spending is going to suffer.
  2. Taxation: At the same time, the way we were all taxed went bananas. A good tax system is one where your marginal rate of tax (i.e. the tax you pay on the next euro you earn) is similar to your average tax rate (what percentage of all your income is paid in tax). Unfortunately, the Irish system is all wrong. Thanks to overly generous tax-free credits, we have not only some of the highest marginal rates in the OECD, we also take very little tax off the majority of workers. For example, the middle earner in 2006 paid about 4% income tax. The OECD calculates an all-in tax on wages each year. In Ireland, it went from 10% to negative between 2001 and 2007. Everywhere else, it stayed about 20%. We all like to think of ourselves as over-taxed. We’re not.
  3. Building: I’m an economist – I love markets, I think they’re great ways of allocating resources. However, they’re not perfect. So if you have a really important market, it needs management and supervision. One such market the government failed to supervise was the housing market. For every 100 people living in the country, Ireland built 14 homes between 2000 and 2007, whereas most countries built about 3 in the same period. Government revenues from the property market increased from €3bn to €9bn as the bubble intensified, an important part of the puzzle of rising spending but a screwy tax system.
  4. Banking: Bubbles need a source of credit to happen in the first place and this happened by not controlling the single most important sector in the economy – the financial sector. Modern financial systems are based on long-term debts financed by short-term deposits, therefore they are inherently fragile and so need lots of babysitting. But during the boom years, it seems the babysitter asked the children how they would like to be babysat. The result? Lending by banks to Irish residents rose 450% in the decade to 2008, compared to a 30% increase in Germany and an increase of 100% in the Netherlands.
  5. The Guarantee: Heading into 2008, Ireland faced four problems: runaway public spending, a screwy tax system, and a housing market and a financial system that were effectively out of control. In late 2008, the global financial crisis started. It was then Government policy made its fifth mistake: the blanket guarantee of all bank liabilities. This effectively nationalised all banks overnight and made markets think there was no more risk holding Irish bank bonds than holding Irish national debt. However, all that unsustainable lending by banks means that holding Irish bank bonds should be a lot riskier than holding Irish debt.

Some of the mistakes that were made have somewhat international roots. I don’t subscribe for a minute to the “It was all fine until Lehman collapsed” story. But internationally, the “Great Moderation” – the period of very smooth economic growth in the 1990s and 2000s – tricked lots of countries into thinking they didn’t really need to regulate their banks.

However, much of the blame lies at home. With the banks, the lack of regulation here was worse than elsewhere, if the scale of bank lending is anything to go by. On building, no other country had the boom in new homes we did. And Ireland’s system of social partnership meant that Ireland’s entire public finances were run by two Departments, Finance and An Taoiseach, and the trade unions. Running a €50bn organisation with such an incredibly centralised power systems greatly increases the chance of the everything going screwy.

How deep is the hole?

The €85bn package from the IMF/EU shows the scale of the problem. That’s slightly more than half the size of the Irish economy – so certainly very large, but not beyond imagination. €10bn is for bank capital, with a further €25bn as an emergency fund for the banks. Adding the €30bn or so put into banks already, the total bill for the banks looks like being about €60bn.

The bank bailout is a huge amount of money. But it is only about half the size of the government’s deficit between 2008 and 2015. This is a very important point: public spending cuts and tax increases are essentially nothing to do with the banks. We need spending cuts and tax increases to correct the problems we have made since the 1990s. We could shave bondholders until they’re bald but that wouldn’t change the need for €15bn in savings over the next five years.

So, as voters, when thinking about Ireland’s mess, we should be very angry about the banks, but we should be about twice as angry about how the Government managed its spending and taxation. Unfortunately, this means being in favour of spending cuts and tax increases. 2010s-Ireland will have to pay for the excesses that all of us who were around in 2000s-Ireland enjoyed.

How do we get out of this hole?

Putting things right means closing our deficit and making sure we never make the same mistakes again. So when politicians come to the door, you should ask them whether they have detailed plans in the following three areas:

  1. Reducing and decentralising public sector expenditure: as a first step, whatever Government is in place will need to reduce public sector spending by about €10bn over the coming five years. About €2bn each will have to come from social welfare, public sector pay, investment in infrastructure and almost €4bn will have to come from healthcare, where the odd situation exists that Ireland, by far the EU15’s youngest country spends significantly more per capita on healthcare than any of its peers. A long-term strategy, though, must tackle the reason public spending was able to get so out of control in the first place: public sector organisations got money from an indeterminate central pot and therefore did not have to manage their budgets. Giving public sector organisations responsibility for managing their finances, and their people, must be the solution to sustainable long-term public spending.
  2. Sorting out the tax system: over the next five years, the government’s revenues will have to rise from €50bn to about €56bn. While this sounds complicated, in reality it only really needs three things: (1) reducing tax credits back into line with countries like France and Germany, (2) introducing a property tax, and (3) ensuring fairness by bringing in a flat income tax of 33% on earnings over €250,000, not unlike the Swiss scheme. For example, on income taxes, if tax credits had increased with inflation since 1997, they would currently allow us to earn about €6,500 tax-free, similar to France and Germany. Instead, we can earn almost three times that, without paying any income tax. On property taxes, Ireland is an anomaly among developed countries for not having an annual property tax. We know the consequences of this to our cost.
  3. Managing important markets: the other two failings of the boom years – not managing the building and banking sectors – must also be addressed. Excessive lending and excessive building are not concerns at the moment, for very different reasons, but the next Government will be putting in place the systems on which our future banking and building sectors will be built. Regulation needs to be effective without being burdensome. It’s a tightrope but we can learn from other countries.

Don’t listen to those who try to tell you simple ideological solutions. One you often hear is that what has happened is the result of “blind right-wing ideology”: simply put, no “right-winger” worth their salt would ever have let government spending go so wildly out of control. Instead, fifteen years too late, we need to adapt to life in the eurozone, manage our most important markets and make sure this never happens again.

source http://www.ronanlyons.com/2010/11/30/irelands-economic-crisis-what-sort-of-hole-are-we-in-and-how-do-we-get-out/

Tag Cloud