Wednesday, January 06, 2010

Some thoughts on Ireland's financial woes.

This letter was a bit surprising. The guy complains that the govt didn't have a plan to prevent overbuilding of hotels. What he seems not to realise is that the hotels were built as a direct result of govt tax breaks. Not only was there no plan to prevent overbuild, they actively encouraged it. It's odd that someone who can put together a letter to the paper wouldn't know that.

One of the worst things about Ireland's problems is that it's not just public debt. Some countries have bad governments that run up massive public debts but not only do we now have the massive NAMA debt and massive yearly deficit, our government created a massive private debt through tax incentives and planning for developments of hotels, leisure centres and housing estates that are now lying empty and even those that are occupied (many privates houses) are depreciating rapidly. It didn't just bankrupt the state, it bankrupted the citizens too.

The EU puts borrowing limits on member states, the idea is to prevent governments borrowing massively and unwisely. It puts no such restrictions on private debt. By encouraging massive private borrowing and then taking a cut via VAT, stamp duty and other taxes, this government was able to get its hands on far more borrowed money than EU borrowing limits allowed. At the same this money cost far more as the govt only took a small cut of what was borrowed. We'd have been better off as a country if the govt had borrowed it up-front while the people stayed solvent.

I really doubt that anyone in govt thought of it as a way of circumventing EU rules. They found a button they could press that made money come in and they kept pressing it without any regard for the consequences. Just like the rats that pressed the "pleasure" button to the exclusion of everything else, eventually dieing of exhaustion. We should probably be thankful we didn't get an extinction burst!. That said, the car scrappage scheme is just another way to encourage Irish people to borrow so that the govt can take a cut. Again, it'd be a whole lot cheaper if the govt just borrowed the money itself without Irish consumers borrowing it at commercial rates and lining the pockets of foreign car manufacturers. Not quite an extinction burst, more like the rat finding a new button it can push.

So why did it happen? Never attribute to malice what can be adequately explained by stupidity. Given that some of the architects of our current woes bought property at peak prices - Mr Cowen at Leeds University, Mr McCreevy at the K Club (now worth almost one million euro less than he paid) and presumably lots of others who got fast track loads from Fingers Fingleton it seems that while there was an element of malice - well avarice I suppose - stupidity was the overriding factor. Unless these property losses are just a smokescreen, these guys had no idea that this was a bubble that obviously had to burst, right up to the end.

Which brings me to the sad conclusion that we are still boned. The people leading us out are those who led us in. They had no clue what they were doing then, they don't even seem to get what the problems were - Pat Gallagher still thinks cheap credit from the ECB was a great thing. There is no evidence that they suddenly have a clue now.

If the whole disastrous boom had been a clever scheme to line their own pockets, then, at least, I'd have to have some respect for their ability, if not their character. I might believe they could cook up a scheme to help the country recover, although I might not trust them to implement it. Instead, whatever pocket lining they managed to do was purely due to being in the right place at the right time and of course some political cleverness. I'm not sure whether we'd be better off with an honest idiot or a clever gangster.

1 comment:

Nelnik said...

I reckon the economy is fundamentally unpredictable. Sometimes there are huge technological leaps that drive it and sometimes technology gets stalled. Who could have predicted in the 1960's that the jet air-craft that we now use 50 years later are almost identical to what they had then.

In 1755 when there was a great earth-quake in Lisbon, religious leaders told people that their sins had caused it. If they had been much more honest they would have said that the did not know the cause. We're still not good at predicting earth-quakes, but we do at least have some understanding of plate-tectonics.

The problem is we don't want to listen to people who say "I don't know". Even if they are the wise ones, we don't learn anything from them. Thus the economists who said a number of years ago that the future is very unpredictable were utterly ignored.

There were of course economists who said that Ireland was going to have a property bust, such as in The Economist magazine. But they're not always right. They've been predicting a property bust in the UK for the last decade which simply hasn't happened.

It is easy to look back now and say that it was inevitable that we were going to have a collapse. In a way that is true, in the same way that it was inevitable that last week's lotery winner was always going to win.