June 20, 2011
The collapse of the Irish economy
Those following business news will have read that many European countries (Greece, Ireland, Portugal, Spain, and Italy) are facing financial crises and are looking for help from external sources. The causes of their predicament are drearily familiar: a banking sector that lent money recklessly on the basis of endless growth in real estate prices and now that that market collapsed, the big banks are demanding that governments must bail them out or that the entire financial system will collapse. It is exactly the kind of extortion that happens in the US. This is why the terms 'banksters', which was coined as an amalgam of bankers and gangsters during the time of the Great Depression, is so apropos in describing them.
Currently all eyes are on Greece but in an article for Vanity Fair titled When Irish Eyes Are Crying, Michael Lewis describes the spectacular rise, and even more spectacular fall, of the Irish economy. "What has occurred in Ireland since then is without precedent in economic history. By the start of the new millennium, the Irish poverty rate was under 6 percent and by 2006 Ireland was one of the richest countries in the world." And yet, within a few years, it had completely tanked.
An Irish economist named Morgan Kelly, whose estimates of Irish bank losses have been the most prescient, made a back-of-the-envelope calculation that puts the losses of all Irish banks at roughly 106 billion euros. (Think $10 trillion.) At the rate money currently flows into the Irish treasury, Irish bank losses alone would absorb every penny of Irish taxes for at least the next three years.
In late 2006, the unemployment rate stood at a bit more than 4 percent; now it’s 14 percent and climbing toward rates not experienced since the mid-1980s. Just a few years ago, Ireland was able to borrow money more cheaply than Germany; now, if it can borrow at all, it will be charged interest rates nearly 6 percent higher than Germany, another echo of a distant past. The Irish budget deficit—which three years ago was a surplus—is now 32 percent of its G.D.P., the highest by far in the history of the Eurozone. One credit-analysis firm has judged Ireland the third-most-likely country to default. Not quite as risky for the global investor as Venezuela, but riskier than Iraq. Distinctly Third World, in any case.
Ireland managed to collapse its banking sector without all the new fangled gimmickry of Wall Street with its derivatives and Collateralized Debt Obligations (CDOs) and Structured Investment Vehicles (SIVs). They lost money the old-fashioned way, with a classic bubble where they kept buying and selling each other real estate at escalating prices using easily available mortgages on the assumption that prices would continue to rise.
But unlike in the US where a homeowner is only liable for the value of the mortgage and thus can walk away from their home if its market value drops below the mortgage amount (a state known as being 'underwater' or 'upside down'), leaving the bank to get what it can from the foreclosed property, in Ireland you are forced to pay back to the bank what you owe. This means that the average person faces unavoidable large and inescapable debts.
Ireland’s 87 percent rate of home-ownership is among the highest in the world. There’s no such thing as a non-recourse home mortgage in Ireland. The guy who pays too much for his house is not allowed to simply hand the keys to the bank and walk away. He’s on the hook, personally, for whatever he borrowed. Across Ireland, people are unable to extract themselves from their houses or their bank loans. Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons. And their leaders helped them to do it.
There is one major difference in what happened in Ireland and in the US. As Lewis says, "In America the banks went down, but the big shots in them still got rich; in Ireland the big shots went down with the banks."
But despite that one slightly positive aspect, the Irish banks are still draining the economy. In March, the Irish government said that they need another 24 billion euros to 'save' the banks, whose ratings have been reduced to junk status and the total cost of the bailouts keeps continually rising.
Currently Greece is in the headlines because of fears that it will default on its debts. I do not think this will happen because the banksters will demand that money be loaned to the Greek government so that it can then give it to the banks. Since these banks have global reach, they can exert pressure on the French and German governments to lend the Greek government the money. Of course, those governments will tell their people that this 'aid' is in order to save the European Union when it is really driven by the banksters' extortion.