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Ireland: An Example of What Works and What Doesn't

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Bloviating Zeppelin: Ireland: An Example of What Works and What Doesn't

Bloviating Zeppelin

(in-ep-toc'-ra-cy) - a system of government where the least capable to lead are elected by the least capable of producing, and where the members of society least likely to sustain themselves or succeed, are rewarded with goods and services paid for by the confiscated wealth of a diminishing number of producers.

Friday, November 26, 2010

Ireland: An Example of What Works and What Doesn't

As I wrote earlier, Ireland is in the throes of its own economic downfall.


It's caught in a vise of its own making, but not in the fashion you might think.


DUBLIN | Anger and fear about Europe's seemingly unstoppable debt crisis swept through the continent Wednesday. Striking workers shut down much of Portugal, Ireland proposed its deepest budget cuts in history and seething Italian and British students clashed with police over education cuts.

The Irish Stock Exchange saw a bloodbath in bank stocks as investors pushed the panic button and bond traders were betting that it would only be a matter of time before Portugal and possibly Spain would be the next countries begging for outside help.

While Irish bank shares plummeted for a third straight day amid fears investors would be wiped out, yields on Portuguese and Spanish government debt shot up sharply because of rising concerns that their debt loads will prove unsustainable and put them next in line for European bailouts.

Irish Prime Minister Brian Cowen announced Wednesday he now expects the EU-IMF bailout loan to total 85 billion euro ($115 billion). Some experts accused Ireland of minimizing the true scale of its financial disaster, saying Ireland probably needs a bailout of 130 billion euro ($175 billion) because of looming defaults on residential mortgages.

"The government is completely in denial about the amount of money they'll have to borrow," said Constantin Gurdgiev, a finance lecturer at Trinity College Dublin.

But let's review:

What brought Ireland "back from the dead" in the past decade? Yes, that would be massive tax cuts and regulatory cuts on the island. All in the name of attracting businesses -- which they did. In spades. Ireland profited.

Even now, they don't want their own bailout.
It is other members of the EU who wish Ireland to take the bailout cash.

With some of the caveats being: you must relinquish your tax cuts and regulatory relaxations on business. Taxes must go up. Further regulations must be installed.

Why? you ask. Because Ireland was in fact "getting all the business." Tax and regulatory cuts work. For the first time in decades Ireland was coming around. You can only rely on sheep-herding for so much . . .

As Dr Peter Morici wrote on November 18th:

Ireland, not the EU, regulates and ensures the solvency of Irish banks.

Dublin’s Treasury does not have the ready cash or borrowing capacity to adequately recapitalize troubled Irish banks, without pushing interest rates on its sovereign debt so high as to make its national budget woes wholly unmanageable.

Without an EU rescue, Ireland’s banks default, its government defaults, or its citizens face cuts in government services likely too draconian to be possible.

If Ireland still had its own currency, it could print money to recapitalize its banks-that is exactly what the Treasury and Fed can do for the FDIC, Citigroup, Bank of America, and other financial institutions.

Printing money would push down the Irish pound against the dollar and other European currencies, result in some inflation and lower Irish living standards, as bank losses were spread over the entire economy. Over several years, however, Ireland’s trade balance would improve, and absent other Celtic missteps, the Emerald Isle would work out of its mess.

Lacking the power to print money, Dublin must accept aid from the European Central Bank and stronger EU governments. This creates much political embarrassment for Irish politicians and leaders in donor capitals, resulting in theatrics and arduous negotiations.

Dublin makes the usual claims that it can handle its own problems, flight from Irish debt follows as well from the debt of other weak EU governments, and the euro weakens against the dollar.

Quick, decisive action becomes impractical when it is most needed, and nervousness abounds about contagion and the euro zone breaking apart.

So why, in fact, did Ireland go down, and why does it face such a crisis now?

Easy to answer: because its government decided to bail out the banks.

And from there they tanked.

Does this sound somehow vaguely familiar, ladies and gentlemen?

BZ

P.S.
Of course, Ireland succumbed to the siren song of the EU and the IMF. It is, after all, money.


9 Comments:

OpenID deaconbleu said...

Well, we've had years of tax cuts here and it's obvious it doesn't work. Ireland has had no wars either.

Fri Nov 26, 06:15:00 AM PST  
Blogger Always On Watch said...

Related: Did you see THIS about Germany? Brief excerpt:

"Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University....

Fri Nov 26, 09:14:00 AM PST  
Blogger Bloviating Zeppelin said...

The EU is NOT at ease. . .

BZ

Fri Nov 26, 10:36:00 AM PST  
Blogger Old NFO said...

Deaconbleu, I don't know what you're smokin, but I want some... This IS the problem of a common currency, and the limitations of the same. The only way the EU will give them the $$ is for Ireland to up their taxes and other rates, making them significantly less palatable to overseas investors...

Fri Nov 26, 01:19:00 PM PST  
Blogger Well Seasoned Fool said...

As a good Celtic lad I say, "Up the EU".

Fri Nov 26, 04:08:00 PM PST  
Blogger A Jacksonian said...

Here's an idea: stop the spending.

Tax cuts do not mean that governments spend less: this is the lesson of Reagan. You can grow the economy, increase the tax base and as long as the spending keeps spiraling up with deficit spending you will get major problems with solvency. Thus it is stop the spending, cut the taxes, reduce government... anything else is a charade and will evaporate away with the first economic downturn.

Fri Nov 26, 06:34:00 PM PST  
Blogger Leticia said...

It's all about the excessive spending and wasting of the taxpayers money.

For some odd reason our prospective governments feel it is their money and they can do what they want with it. Regardless of the economic damage.

They must be held accountable.

Sat Nov 27, 04:19:00 PM PST  
OpenID deaconbleu said...

So...you call the Stimulus 'necessary spending?' If not we'd all be standing in breadlines right now.

You guys are so quick to say 'cut spending' but like the GOP leadership, you don't say what or how.

The fact is, corporations just posted record profits (so much for Obama is 'anti-business') and they still are not hiring-so they can make even more profits. It's back to the robber barons era.

Sat Nov 27, 05:21:00 PM PST  
Blogger Maggie Thornton said...

All too familiar, BZ.

For some reason I cannot post a comment with OpenID. I'm on Wordpress but not Wordpress.com. Google will only connect back to my old blog, so I'll do that and put my link here. Let me know how I should handle this in the future.

Maggie@Maggie's Notebook
http://maggiesnotebook.com

Sun Nov 28, 10:17:00 AM PST  

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