Are European leaders fiddling whilst Ireland’s finances are burning?

Last night I saw a headline on the television news channel that I was watching and it said that Chancellor Merkel of Germany and President Sarkozy of France had called for “prompt action” on Ireland. This intrigued me as if you look at the institutions they set up back on May 10th of this year then with a response time at best of 3-4 weeks for one and 5-6 weeks for the other it made me wonder if they know what “prompt action” is. Perhaps this illustrates the difference between political and financial market timetables or more harshly perhaps it represents a known political tactic of calling for something you know  will not be happening to hopefully avoid you being (rightly) blamed. It probably sounded good to their PR department. Tucked away if you look at the deeper implications of this is a theme of the Euro zone crisis since in began in the spring of this year which is that Europe’s politicians have felt all along that they can control events when in fact events have ended up controlling them. This leads to their continually being involved in short-term solutions to crises rather than getting ahead of events and setting a consistent long-term plan. In other words this represents a severe policy mistake as they have lacked any sort of realistic strategy just at the time one is most needed.

Axel Weber muddies the waters

In an interesting intervention Axel Weber who is the President of the German Bundesbank and a member of the European Central Bank said something yesterday which also was somewhat misleading. According to Bloomberg news he referred to the Euro zone shock and awe rescue fund

Seven hundred and fifty billion (Euros) should be enough to assure the markets………If not, it will have to be increased.

If we analyse this then Mr.Weber should know better than this. If we examine the 750 billion claim this as I have pointed out on the 25th of June and more recently on the 12th and 17th of November that the reality is that the real number due to weaknesses in the design of the package is more like 400 billion Euro’s perhaps 450 billion if it gets a following wind. To say that it will have to be increased again ignores fundamental problems. Firstly the money has to be raised on financial markets and these are the same straightened financial markets which are going to have to support a lot of borrowing over the next couple of years. The money is not given by governments they are in effect loaning their credit rating. Even so the implications of this borrowing as I shall discuss in a moment are hitting home. So governments may say no to this as Mr.Weber’s own government appears to have already done.

Comment

I wonder what Mr.Weber’s real intentions are with this speech. His past pronouncements have been much more in touch with reality than this and perhaps he was speaking to Europe’s politicians rather than us. If so his message is that their scheme is not big enough and I wonder what their response is.

Has there been any impact on Europe’s paymaster Germany?

If you consider that Europe’s rescue plans in essence involve borrowing a large amount of money on financial markets then you cannot avoid the conclusion that her ability to do this relies a lot on Germany as a paymaster/provider of a good quality credit rating. However as markets are forced to consider this it appears that there have been costs for Germany. In the euphoria after the announcement of more quantitative easing by the US central bank on November 3rd German ten-year bund yields dropped to 2.42%,whereas last night they closed at 2.71% for a rise of 0.29% in around 3 weeks. This of course coincides with the likelihood of Germany’s credit rating being used to help bailout some of the peripheral Euro zone nations.

Has this affected Ireland, Greece,Portugal and Spain?

There is an irony of this in that the government bonds of the peripheral Euro zone nations are often priced as a spread over those of Germany. Accordingly as German government bond yields rise so do those of the peripheral nations. I think the obvious link is that the likelihood of the shock and awe rescue mechanism being used has raised German bond interest rates which has led to a rise in Irish,Portuguese,Greek and Spanish government bond yields. Yes we now have it so far the rescue mechanism has made things worse for the suffering countries.

Ireland and her Gross National Product

The situation here continues to deteriorate. Irish ten-year government bond yields closed last night at 8.99% and her overall bond index fell to 80.75 from the previous close of 81.50. Apart from the previously mentioned dithering of Europe’s leaders there are other factors involved in these rises in yield.

As time has gone by I believe more investors have become aware of the difference between Gross Domestic Product and Gross National Product and the significance of this for Ireland.Even some economists have caught up! In a nutshell she can tax GNP but not GDP. Now if we take the Irish government’s own forecast for national debt which was for it to be 100% of GDP in 2014 and try to convert this into GNP we get 120/125%. This does not look so good and just as a reminder of yesterdays discussion the Irish government’s forecasts involved a very favourable growth forecast to get there.

Let me add something which also troubles me. We still have not got to the bottom of the problems in the Irish banking sector. It is not possible to say how much extra it will cost but we can be sure there will be some extra and maybe a lot extra. The Irish four-year plan assumes the state of the Irish banking sector to be as it was on the 30th of September. Unfortunately the inconvenient  truth is that it has got worse since then and is likely to worsen as time goes by. If you put these facts and expectations into the Irish four-year plan the situation looks much worse than it has been presented to be.

The UK’s loan to Ireland

We have promised funds to Ireland although this is the Euro zone so it should not be a surprise that we still only have estimates for how much. Regular readers will know that I felt we should hold fire and wrote to the London Evening Standard and the Chancellor of the Exchequer to explain why. He has not replied. Not even a week later it looks even less likely that these loans will ever be repaid in full as Ireland cannot afford to on any reasonable forecast. Accordingly when we issue bonds to finance any bilateral loan they should be of longer rather than shorter term, the usual EU mantra of 3 years frankly just looks ever sillier in the face of reality.

The UK Economy

This week we saw that the Office of National Statistics confirmed that growth in the third quarter of 2010 was 0.8%. If we wish to feel good then let’s put it in the American annualised version so we are now at 3.2%! Indeed if we now recalculate the last half-year and annualise it we are up to 4%! Anyway returning to a more mundane reality growth so far in 2010 has been 2.4% in only 3 quarters of the year.

As we are a big trading partner for Ireland perhaps this will help her a little at this time but I would like you to keep this number in mind as I discuss the meeting between some members of our Monetary Policy Committee and the Treasury Select Committee from yesterday.

The Treasury Select Committee and the MPC

Paul Tucker

Here we saw some interesting thoughts and I believe that they were revealing. Let me combine two bits.

To date, growth has been a little stronger in 2010 than projected………..Earlier in the year, I had half expected by now to be withdrawing some of the exceptional monetary stimulus.

You might think that he might have been voting for a withdrawal as growth has been high and inflation has been over its target.But we also get a curious section on inflation.

Although the persistently high inflation out turns are basically due to factors that should have only a temporary effect, a rolling sequence of price level shocks is not easy to explain to the public or businesses. That is especially so when commodity prices, and so input prices, could easily continue to rise given robust growth in Asia. It is, therefore, absolutely vital for the MPC to be unwavering in our commitment to low and stable inflation over the medium term. Only if we maintain our credibility can we be effective in supporting the recovery of demand and activity.

Considering what has actually happened I guess many readers will be wondering what “unwavering in our commitment” and “credibility” mean to Mr.Tucker. Yet again we are back to the mantra of inflation being temporary but now the MPC is ignoring the fact that growth has been stronger than expected too. I get the feeling more and more that their forecasts are now to justify their existing policy rather than any real belief.

On the subject of inflation Mervyn King the Governor of the Bank of England spoke too and the emphasis is mine.

Over the past year, inflation has been high. At present it is 3.2%. The high outturns reflect a variety of factors that have pushed up on inflation in the short-term. The exchange rate depreciation has raised import prices significantly; there have been sharp increases in global commodity prices and sizeable changes to VAT. It is impossible to tell precisely how inflation would have behaved had these developments not happened. But it should not be surprising that their combined effect on inflation has been very large and persistent. It seems likely therefore that without the effect of these factors,inflation would have been significantly below the target over the past year. That is consistent with other evidence that spare capacity has been pushing down on inflationary pressure.

 

 I have highlighted the first section because it is contradictory. The exchange rate depreciation took place mainly in 2007/08 and the effects have followed on. As we are now at the end of 2010 its effects are by no means the short-term claimed. Also the raising of import prices which followed was easily predictable although Mr.King failed to do so at the time. The second section highlights a common issue with policymakers as they love to exclude reasons for inflation rising from events. Satirists have already come up with inflation indices which ignore all price rises and indeed of course so did mathematicians a very long time ago when they discovered the number zero. I also notice the use of the word “persistent” in relation to inflation by Mr.King and wonder if he might spare the time to explain to us how this is consistent with his previous use of the word “temporary”.

 If we deal with his last sentence I find it hard not to laugh out loud “evidence that spare capacity has been pushing down on inflationary pressure”.If you look at the UK’s situation where we have just come out of a severe recession our inflation has been surprisingly high not low. Also if I may help out Mr.Tucker with the common usage of language many of us use inflation rather than “a rolling sequence of price level shocks”.

Politics on the MPC

It is interesting that Adam Posen made clear that “more than just me and fewer than a majority” on the MPC had objected to Governor King’s support for the austerity programme of the coalition government. As a point of principle I agree. But there is a flaw here. The minute the MPC started on its programme of Quantitative Easing it lost its independence and became dependent at least in part on government. This is one of the reasons I have suggested that members of the MPC should in future be elected.

There was also some irony in discussing political interference to a committee composed of politicians!

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24 thoughts on “Are European leaders fiddling whilst Ireland’s finances are burning?

  1. “…which is that Europe’s politicians have felt all along that they can control events when in fact events have ended up controlling them. This leads to their continually being involved in short-term solutions to crises rather than getting ahead of events and setting a consistent long-term plan. In other words this represents a severe policy mistake as they have lacked any sort of realistic strategy just at the time one is most needed.”

    Hi Shaun,

    Well of course this is one of the key ubiquitous attributes of amateur managers in all sectors! It is commonly termed “seat of the pants management”. Governments of course are supposed to be managing on the macro-scale, and the problem is that the attributes necessary to get elected as a politician are in complete antipathy with those necessary to be a good manager, most of all on the macro-scale? Once elected therefore these people are always completely out of their depth. Dr. Peter summed it up quite well in his Principle, as did Shaw in his “Back to Methuselah”.

  2. Mervyn’s statement reminds me of a hilarious interview I heard as a young boy in the early 80’s. A footballer was asked where things had gone wrong in a 3-2 defeat to which he replied “I don’t think we particularly did a lot wrong; if we could just have scored a couple more goals then we’d have won”.
    MK and the rest of the MPC are a complete and utter laughing stock (or at least they would be if things weren’t so serious). Everyone in the whole country knows that they are desperately throwing their whole armoury into a futile attempt at propping up the UK residential property market, as when it collapses the game is up for the banks and the rest of the UK economy.
    Their incompetence and cowardly behaviour over the past 10 years has sunk this country. Their pathetic attempts at justifying their actions only insults our intelligence.

  3. well,well , EU states Portugal does not need a bailout – how long do you think that posistion is going to last

    because if/when they do go – surley the game’s up then ?

    F.

  4. And government became dependant on the BoE. Fiscal austerity combined with loose monetary policy is the current orthodoxy.

  5. Let us not also forget the astonishing stupidity of creating a Eurozone on the basis of “converging” economies. Forget the details and ask a politician the following question:
    Is there a single person on the planet who actually thought that the economies of Greece and Portugal had become similar enough to that of Germany to enter a permanent currency union?

    The problem is that it is as true today as it was then. These economies are fundamentally different in respect of:
    1. Export/import balances;
    2. Honesty of population in paying taxes;
    3. Property markets;
    4. Attitudes to inflation;
    5. Running government deficits;
    6. Dealing with a hard currency;
    7. Savings rates, demographics etc.

    Since joinig the Euro, the terms of trade have shifted massively against Ireland, Spain, Portugal, Italy, France, Greece and in favour of Germany. In other words, all of the problems of convergence at the start of the Euro have got worse, not better.

    The question that no-one seems to ask is:
    After all these bail-outs, refinancings, budget cuts etcetc, why does anyone think that the economies have now converged sufficiently to keep the currency union?

  6. Not economics here, but I just got told by a friend in Ireland whose bro in law is in the Irish Defence Force that they are being recalled from foreign peacekeeping and will remain at home for the foreseeable… are the Irish govt worried abt unrest?

    • James,

      Doubt it – Gardai amply prepared for any and all illegality. If true, most likely due to the fact that UN hasn’t paid for Irish Peacekeepers in many years, and their necessary peacekeeping duties abroad can no longer be subsidised by the Irish taxpayer.

  7. I can agree that the skills necessary to be a successful politician are not those that qualify someone to run the economy. But then, it is the people who supposedly do have those skills that have run the economy into the ground. Leaving aside the absurdity of “light-touch Regulation”, the worst that can be leveled at the politicians is that they have not been very good at cleaning up the mess.

    Why? Partly because politics is a relatively slow process when compared to markets: but mostly, I would argue because they are still listening to those same “expert managers” who have persuaded them to try and reflate the bubble so as to prevent their losses from crystalising.

    As you rightly say, politicans are not experts so, when told by “experts” that not to do so will have all sorts of dire consequences and that “there is no alternative” they tend to belive them.

    The result is that politicians are now in thrall to the markets and politics is, for the time being, taking a back seat to economics.

    It seems increasingly likely that the debt mountains will prove too big to be paid off by taking on more debt (as if that were even possible): and it is hard to imagine a return to the levels of economic growth that were only possible in the first place because of ever increasing levels of debt (backed by ever increasing house prices) – for me this has a grim inevitability, but I still hope I’m wrong.

    Consequently, people are goinmg to conitune to get poorer – lower wages, fewer jobs, little growth, higher taxes…… and at some point in the piece real politics will re-assert itself. That is politicans exercising real power through Regulation etc rather than through economic instriments: on behalf of real people rather than to massage statistics.

    The further down the road we get before this happens, the more extreme (not to say unpleasant) the outcome is likely to be. To my eye, it would be far better for our politicians to face down the markets – and face up to the depth of this crisis – now. Let the losses fall where they will – and then get on with rebuilding.

  8. According to Brosley’s link to the Irish Times, the “troika” is talking about bondholder haircuts.. this is what Ms. Merkel said in Berlin that helped to set off the latest crisis. While this would only be right, the problem here is that bondholders of Iberian and Greek debt might become worried and head for the exits, thus making a bad situation worse. I see the Irish ten year went over 9% today, and though I have no figures for the other bailout candidates, I’m kinda thinking they also took a beating. A slippery slope indeed.

    • Hi Mr.K
      In essence we go into a third weekend where action is expected for Ireland. To Daniels post of a while ago asking what should be done in rescue situations I have two main suggestions.
      1. Try to avoid moral hazard
      2. Act decisively and get it right first time. For musical interludes Gerry Rafferty’s Get it right next time is clearly inappropriate here.
      Neither have been achieved in the case of Ireland and Greece and the outlook for Portugal doesnt look inspiring either.

      There have been lots of flaws in the response and I suspect they cannot agree on what to do next. For example if they now impose haircuts they have the problem of the bonds that the ECB now holds… only 66 billion Euros and counting.

  9. Pardon me for raising what I am sure is a very naive question: would it not be better, in the long run, for Ireland/Greece/whoever else to default now? After all, austerity measures on the scale being adopted in these countries cannot be conducive to growth and ultimately growth is surely what is required to generate the income to repay the debts. The longer they maintain the fiction that, for example, a nation of 4 million people can easily repay an €85 billion debt, the longer they will be paying the interest; if a default whether full or partial is inevitable, I cannot see any upside from ireland’s point of view. Now, I understand the argument that if the paper is held by German banks, such a default would render them in need of a bailout; but wouldn’t it be easier for Germany to sell a bailout for its own banks than for Ireland? Also, as an aside, I believe that the UK’s war bonds were originally issued with a maturity date but subsequently the government declared them irredeemable. Would it be theoretically possible for a modern country to do the same? I imagine it would not enhance their ability to raise further funds but by the looks of things the markets are not keen to lend to these borrowers at any price in any case. Furthermore, it would reduce the aggregate amount that the world’s capital markets are expected to fund over the next few years – a very challenging number, as I understand it.
    As I said at the outset, I do apologise for the naivete of these points but I would be very interested to hear your thoughts.

    • Hi DrS, I think you make some very good and valid points. As you imply the aggregate debts which global governments are sustaining as a result of their utter profligacy and recklessness have now got to the point where on the face of it either it will be impossible for many of them to ever be paid off or some governments will have to default in some way. As you rightly also observe this scenario will make it extremely difficult or impossible for additional real wealth to be generated to produce real growth so as to be able to get into a position to pay off these debts..

      However you seem to have omitted from your summary the predominant characteristics of fiat currencies and of politicians. Fiat currencies do not have any datum and their value is only notional. Politicians are the highest level of Confidence Tricksters. Put the two together and you have the solution.

      You mention previous defaults on war debt by declaring bonds irredeemable. All of these devices are available to the highest level of Confidence Tricksters, who have the law, police and military to enforce whatever fraud at the macro level they implement. So I believe the way out for global politicians will be as it has always been. They will use covert default methods like the one you cite and/or will debase their fiat currencies to reduce their incurred debts. They will of course accompany this device by the now established scam of fraudulent official inflation data, grossly understating the inflation which they are generating, so as to fool their electorates.

      Confidence Tricksters always have to use the two main generic elements in any scam; firstly fool the mark or marks into believing that the trickster is honest and truthful, and that what is offered is real; then move in for the intended kill. They cannot try one without the other, or their deceit will not work. That is why the generation of significant inflation by governments is always accompanied by fake official inflation data, so as to conceal what they are doing from the masses.

      As you observe, there really now is no other way! However I also believe there is likely to be increasing insurrection as a result, since much of this inflation will be at high levels which will cause ordinary people much pain and suffering.

      • “They will use covert default methods like the one you cite and/or will debase their fiat currencies to reduce their incurred debts. They will of course accompany this device by the now established scam of fraudulent official inflation data, grossly understating the inflation which they are generating, so as to fool their electorates.”

        While this is what many people expect (and it’d be hard to argue against it), you have to wonder how this would work in practice, due to the potentially lengthy inflationary period required to have a material effect on reducing the real value of the debt.

        So far, we’ve had two years of this “dance”, and there seems to be a growing awareness that the inflation people are experiencing is rather greater than the official figures suggest, and that the MPC is spinning something of a yarn. I’d expect bond purchasers to be equally or more aware, since they run the risk of large capital losses should yields normalise.

        During those past 2 years, QE supplemented demand for gilts, as did safe-haven appeal. Going forward, then as inflation awareness and expectations built, you’d expect gilt yields to back up (possibly very significantly), unless either:
        (i) the QE gilt purchasing bubble; or
        (ii) safe-haven concerns;
        could be sustained for the medium term.

        Both these scenarios have problems.

        (i) If QE was maintained to sustain the gilt bubble, then the currency vigilantes would presumably intervene, steadily (or not so steadily) weakening sterling. This would ensure that during that period there’d be little interest from overseas investors in buying gilts, until sterling had already overshot on the downside, and thus offered the opportunity for appreciation during an eventual future return to a higher level. In this case, then, it’d be domestic (captive) buyers of non index-linked gilts who’d take the pain. But a QE maintained gilt bubble in the face of steadily rising inflation would be a very obviously dangerous place to invest, so again you have to wonder who even domestically would be buyers in such a market.

        (ii) For save-haven concerns to maintain gilt demand over the medium term, even in the face of inflation that was not reflected in the yields being offered, then I’d imagine this could only be possible in some “sweet-spot” where (a) inflation was not too great and (b) fears persisted of a significant (deflationary) crisis being “just-around-the-corner”. Sort of where we are today. I’m not sure whether this is sustainable though, since any deviation from the sweet-spot conditions could result in a very different level of demand for gilts, with the deflationary crisis outcome doing nothing for the reflating away of debts.

        The suggestion must be that steadily reflating away the debts faces some hurdles, and there’s every chance that it’s a path which rather than being a relatively painless one, risks precipitating a further crisis.

        And it’d be more fun scenario building if we weren’t living in the scenarios.

    • Hi Dr S and welcome
      It is not a naive question at all and I discussed such topics when this blog was in its infancy and the Greek crisis was building. If I go back to then my recommendation was for two things that have not taken place. The first was for a restructuring or technical default on Greek government debt. My initial suggestion was for a haircut or punishment of 15% on all Greek government bonds and the logic behind it was that it was a years borrowing with a little margin to buy Greece a year to implement some measures. I also argued that austerity needed to be applied like pumping the brakes as we used to be told to do in an emergency stop before ABS brakes came in. This was to stop a downward spiral of the sort that I wrote about in my article on Latvia. The reason for this is that IMF plans have their flaws.

      So yes I argued for a type of default and over time if we stick with Greece I have raised the % haircut required, if you asked me now I would suggest 30%. The reason why I have not discussed this in a more upfront manner with Ireland is not that I do not believe it is a vital component of any recovery plan. It is because the nature of Ireland’s problems and the fact that she still appears to be a long way away from a solution to her property and banking crisis means that I cannot give a number that I have confidence in. Putting this another way and looking at what RTE and the BBC claims is the size of the bail out fund i.e 85 billion Euros I have no confidence in that as being sufficient. Moving onto my letter to the Chancellor it is another reason why I think the UK should not have further involved itself. In my view the situation in Ireland is still deteriorating and we are still not at the bottom of it.

      As to longer-term bonds they are seldom issued as such at the time! That usually comes later! There have been in Mexico some 100 year bonds issued recently which intrigued me. I can understand at this time why someone might issue them but less so why they would be bought. How much of an irredeemable issue would you expect Ireland for example to sell,and at what price?

      The truth is the bail out so far have been to the benefit of the banking system and now we are worse off in many ways. For example of the distressed debt the ECB now holds at least 66 billion Euros of it. So do they apply haircuts to themselves and the Euro zone taxpayer?

      • Sean
        I quite agree that Ireland would not be able to sell an irredeemable issue – at any price – just now. What I meant was that, to the extent that a lot of government borrowing is in effect simply rolling over maturing debt, would it be possible for a country to say ‘you know that 3% bond we said we were repaying in June? Well, we’re actually extending the maturity date to 2030. [or 2110 or whatever]. Default? Heavens, no – we’re still paying the 3% coupon, aren’t we?’

        • Hi DrS
          An interesting suggestion but you are defining one of the events which is called a technical default! Put another way one of the types of technical default involves extending the term of the debt/bonds you have which in essence is what you have. It has been one of the suggestions put forward as a potential solution for the countries in trouble, I remember it being suggested for Greece for example, but has implications.

          If we run through a scenario let us say that Ireland says that she will roll forward the government bond she has that will mature next (November 2011) to say 2020. Investors who were expecting 100 Euros back on this date for evry nominal 100 Euros would now face the prospect of not getting this back until 2020. Apart from the issue of loss of credibility and broken promises we can do some rudimentary maths. The price was 99.94 yesterday but would drop I estimate to more like 60. Not much of a reward for investors in your stock and imagine what investors in your other stocks might then do…

    • You could argue that keeping Greece afloat is to let them reform their economy before defaulting. However this argument does not work in the case of Ireland as they have bailed out the banks it was far too dependent on.

      The IMF declared in the paper ‘Reasons Greece will not default’ that no country has ever defaulted on purpose. Congratulations for finding a counterexample. It is said that UK hasn’t defaulted but War Bonds and leaving the gold standard are counterexamples.

      War Bonds seem to me a good investment. At face value 3.5% interest is better than inflation and better than many savings accounts. They are usually a lot cheaper than the issued price making the interest rate a lot higher. Plus there is always the hope that the government will eventually pay up.

  10. Hi Shaun,

    The two planks of the monetary policy remit that Mr King is relying on is : a) temporary price shocks b) causing volatility in output against which monetary policy can lean. Mr King emphasised the volatility in output danger justifying his current stance. I agree that a) is looking a bit ragged at the edges!

    • Hi Shire
      I was fascinated/intrigued by his use of the word persistent which seems to have replaced temporary without any explanation. If I had been there I would have asked if he understood the meaning of the two words and if so how he explained the difference…. It does after all represent quite a change and the MPC is somewhat prone to this sort of thing which deserves an explanation and perhaps an apology but does not get one.

  11. Greek, and for that read as many EU nations as there are, politicians should have taken control over their own affairs long ago. However it looks like solace, and blame appropriation, is being found in being part of a much larger unit, staffed with as incompetent personnel if not more so!

    At some time there will be a tipping point reached with the public’s dissatisfaction manifested. What happens then is anyone’s guess. To circumvent the extremes of that situation options need to be talked about openly, questions need to be forthcoming concerning current policies and a wholesale consensus reached, especially involving the people who are going to have to do whatever that includes.

  12. Ireland’s situation is entirely down to its grossly overextended banking sector. While the following wont effect Ireland if the UK enacts the following (http://www.bankofenglandact.co.uk/) we will go a long way to nipping this issue in the bud.

    As long as the Banks can effectively create money these issues will continue and with greater volatility until we have the Von Mizes ‘Crack up Boom’ and we’ll be back to bartering. Of course by that point the elites will have sewn up all of the hard assets and will sit back and let us rip ourselves to pieces

  13. “Politicians are the highest level of confidence tricksters”.

    I hold not brief for politicans – but I can agree with this only because the whole economic and political edifice is a confidence trick – and politicans are, ultimately, at the highest level.

    I would not agree, if the sentiment being expressed is that politicans are particularly venal – and they have conned investors. governments didn’t tell Irish banks to invest in property development: nor di they tell UK and other banks to lend to Irish banks.

    For the last thirty years the markets have been selling a monetary theory in which we can all become richer by taking on more debt: and demanding light touch regulatio to allow this to happen And, like all Ponzi schemes, it appeared to work. For a while it gave the appearance of greater wealth because asset prices (notably house prices) went on increasing because people could borrow more – and then more still on the back of the higher asset prices.

    The fact that they were spending more and more of their future income on current consumption – and that this cannot go on forever – ought to have been apparent to everyone involved. But it was not – largely because the supposed experts were telling everyone that the ride could go on forever. Having acknowledged that politicians are not experts, its a bit much to expect them to overrule the experts and kill the goose while its still laying golden eggs.

    If the experts are now getting upset because the politicans are going to ask them to take a hit: well that’s understandable – but they’re supposed to be the experts – no?

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