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Samizdata quote of the day

“Ireland’s membership of the euro was thus the single most important reason for yesterday eye-wateringly large bailout of the Irish banks, which will take the budget deficit to 32 per cent of GDP and its gross government debt to 96 per cent of GDP. The tragedy is that nobody is pointing this out: the political establishment is too closely implicated and may yet need to draw on a European bailout fund. Imagine what would have happened had Britain also embraced the single currency: our interest rates – which were substantially higher than the Eurozone’s, albeit still too low – would have stoked our own bubble to an even greater extent than anything managed by the Bank of England. The UK property bubble would have been even larger and its implosion even more devastating. We don’t realise it – but Britain’s bust of 2008-09 could easily have been much, much nastier.”

Allister Heath.

It might be worth re-reading this to recall the ferocity of those pro-euro folk and their treatment of anyone who sought to stand in their way, including, it seems, ordinary voters.

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2 comments to Samizdata quote of the day

  • Paul Marks

    Agreed J.P. – things could have been worse.

    However, I do not believe the stats put out by (for example) BBC Radio Four’s “More or Less” mathematics show.

    They claim that the bailouts (etc) will cost about ten thousand Euro’s per person in Ireland, but “only” about 100 Pounds per peshon in the U.K.

    However, this number is arrived at by assuming that the bank shares currently owned by the British government will be sold at “market values” (forgetting the stock market value depends on hte subsidies) and it also forgets that a lot of bank profits are actually from government sweetheart loans (i.e. the Bank of England creates money, from nothing, and hands it out to banks and other such at nominal interest – they then lend it back to the government, and others, with a mark up).

    Of course even if the calculation is out by a factor of ten (which would not astonish me) it is still 8 or 9 times less (per person) than the Irish will be paying.

    Surely this exposes the “too big to fail” absurdity. The Irish credit bubble (due to low interest rates and so on – as you rightly point out) was so big that it was insane NOT to let the banks fail.

    “But every private bank, bar one, would have failed if the govenrment had done nothing Paul”.

    So what?

    The costs would indeed have been terrible – but not nearly as terrible as what the Irish government has paid and is going to pay for going down the bailout road.

    And the Irish banking industry could have been rebuilt from scratch on honest principles – now the whole corrupt mess gets maintained (in all its rotteness), there will be talk of reform and lots of changes to regulations, but the basic FALSE PRINCIPLES will remain (poisoning the future).

    There were private banks where depositors (let alone bond holders) were NOT guaranteed before the crises started.

    The Irish government choice to go intervene, after the crises began, and guarentee everything to everybody (thus attracting loads of “hot money” into Irish accounts – making the problem vastly WORSE) ranks as one of the worst public policy judgements of all time.

    Yet there is no real sign than academia (or the mass media) has really learned anything – all they argue about is whether or not there should have been government spending cuts to finance part of the bank bailouts. Letting banks go bankrupt does not even enter their minds.

    But, of course, if banks are not to be allowed to go bankrupt then this is not free enterprise – it is a “corporate state” game where “profits are private, but losses are public”.

    If that is “capitalism” then it would only be natural for people to turn to socialism.

  • PeterT

    I see Alistair’s point, but I think it is wrong to blame (in part) a single currency for Ireland’s woe’s. The problem is not that it is a single currency per se, but the inflationary policy of the ECB. After all, the gold standard was a global single currency in effect.

    In a high growth economy, interest rates should naturally increase to match growth rates in the economy (if capital is scarce). In theory, if interest rates are too low depositors should withdraw their money and invest it elsewhere (equity markets, houses etc) until the markets equilibrate. Equivalently, investors would take out loans and invest these into their projects until the rate of return on these falls to match the borrowing rate. But in a fiat currency system this does not happen, at least not fast enough; the government prints more money; it is not scarce. There is nothing wrong with money flowing from low growth areas such as Germany to higher growth areas such as Ireland.