Eating the Irish

Here's an interesting column in the New York Times by Nobel Prize-winning economist Paul Krugman. I don't know about you, but I haven't paid much attention to Ireland's economic troubles. Well, our own economic problems here in America absorb most of my attention, with just occasional glances around the rest of the world.

I guess I just assumed that Ireland had gotten into trouble when this economic collapse depressed government revenues and made an existing deficit hard to manage. But according to Krugman, that's not exactly what happened:

The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

Or to be more accurate, they’re bearing a burden much larger than the debt — because those spending cuts have caused a severe recession so that in addition to taking on the banks’ debts, the Irish are suffering from plunging incomes and high unemployment.

Krugman goes on to point out that austerity measures are just making the problem worse, since cutting back on spending is the worst thing you can do during an economic collapse. But I already knew that. I was just struck by how Ireland got into this mess in the first place.

Keep in mind that Ireland is a small country. Ireland's GDP is only about $227 billion, which is less than that of Detroit.  America's GDP is more than $14 trillion - more than 63 times as big. America had to "bail out" our banking industry because we had no choice. Its collapse would have taken down the entire world. But Ireland could have let the people who made these risky bets pay the price, don't you think?

Admittedly, any shock when the world was already reeling would have made things worse, but I have to wonder what Ireland's government was thinking. Unfortunately, modern capitalism seems to be win-win for the moneyed classes. If things go well, they keep the profits. If things go badly, everyone else loses.

This is particularly the case with modern finance. Bankers made millions packaging up bad debts to sell to other people. They received multimillion dollar bonuses for making the sales, and it didn't matter that it was all a house of cards, because someone else was taking on the risk. (We were, as it turned out.)

We Americans, with the biggest economy in the world, couldn't have let our banking system just collapse. That would have been cutting off our nose to spite our face. But now we're paying the price, while the wealthy are enjoying boom times again. (And yet, they're still clamoring for more tax cuts. That really takes gall, doesn't it?)

Well, it was our mistake to cut back on bank regulation. It was our mistake to encourage a bubble by cutting taxes on the wealthy in the first place. Our mistakes - primarily in electing the Bush administration and its allies in Congress (and I don't absolve the Democrats who went along with it) - let this happen when it could have been avoided.

But Ireland, as small as it is, could have let their banks collapse, don't you think? Or, rather, they could have let them go into bankruptcy, let them reorganize while letting their debtors pay the usual price of all risky bets that go south. After all, that's the risk you always take when you lend money or buy stock.

Bailouts are rarely fair, but sometimes they must be done. I'm not one of those tea-baggers who complain because the people they elected collapsed the economy, and then object to the desperate measures necessary to keep the whole system from melting down. But if I were an Irish citizen, I wouldn't be too happy, I think.

But maybe there's more to this than I know. Since I'm not an Irish citizen (although I have considerable Irish ancestry), I haven't been paying close attention to their situation.