Sunday, 30 December 2012

Ireland and False Promises

Anyone who has been watching the news over the last 4 years will definitely remember the case of Ireland. A very strong economy, booming at the time, faced significant constraints in 2008 due to the large exposure of banking institutions to sub-prime loans abroad, in addition to a housing bubble burst in the country. Thus, in order for the Irish to be able to save their banks, a joint IMF and EU loan of about €85 billion was granted to the nation. The terms were the usual: austerity and even more austerity.

The result: as of 2012, only 1% growth in GNP instead of the promised 4% in a 2009 forecast. Government debt is 120% instead of the forecasted 79%, investment fell about 4% instead of rising by 9% and the only reason unemployment has fallen is because 350,000 people have fled the country. (I am really beginning to wonder what the people behind the forecast were thinking when they calculated the numbers).
Protests against austerity measures. Source: William Murphy/Flickr under CC 2.0

The case of Ireland resembles the cases of both Spain and Cyprus: a housing bubble bursting and bank bailouts which forced the nation to assume extreme levels of debt. The result will also be the same: austerity measures, destroying any potential for growth over the next years, people facing extreme difficulties in their everyday lives as even though wages and pensions are falling prices do not follow the same route, and the "upper" class not having to worry about any of these.

Bank officials are still earning six-digit incomes every year, and politicians have seldom seen their wages diminishing over this period. According to the Irish Times, politicians most people have never heard of, are entitled of a €2.2 million pension. Had this occurred at any other period of time, we would have just thought it was because the economy is booming; at the present time it appears as a ridicule to the efforts of the innocent people bearing the cost of the banks' errors.

We are moving towards a pure capitalist society where money comes first and everything else second. At least that is how our leaders behave. We have to pay for the mistakes others have done. I heard a saying once that an insane person throwing a rock in a well will need 40 sane people to get it out. This is what is essentially happening in Europe now. We are paying for wrong decisions, poor judgement and false ideologies. Politicians cannot see the way we do because their incentives are different. In a discussion with Constantin Gurdgiev he stated that politicians face the same incentives as bankers; he was right. It does not mean anything to them whether 99% of the people are paying for the sins of the other 1%. Simply because they will get their money and benefits anyway. And if they manage to do something good for the country as well then even better; if they do not who cares?

The distinction between politicians and those who elect them is growing larger and larger. This inevitably leads to the former believing that they are masters of the game and the latter hoping that the game will someday change. The only way for this to change is to have the politicians more liable for their actions than they are now. I have already proposed a scheme for this, with the goal of aligning the politicians' and policymakers' incentives to those of the people who elect them. The issue is who would be brave enough to apply it?

We all know that having to suffer for the banks' mishaps is unfair. Yet, the banks should not have allowed us to spend so much in the first place. It all goes back to a vicious cycle of banking policies, supervision and the notion that the state will always be there as the lender of last resort. New banking supervision rules should be made so that no systemic collapse can occur when a banking institution fails. Given the size of the banks in the modern day a simple solution would be to split them into separate institutions. Yet, what politician or policymaker would be so determined to do so given that their incentives tell them a different story?

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