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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.
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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.
Comments
I think we can already see that finance capitalism will turn out to be a self-limiting aberration. Unfortunately, the wreckage it will leave behind will be mind-boggling.
I was going to quibble with Lewis's inadequate discussion of mortgage-loan mechanics, but the full article is very powerful and deserves to be required reading for every Republican who likes to blame Europe's woes on rampant socialism.
Apart from his perceptive insights into the Irish national character, I was impressed by Lewis's account of the government's fatal error to save these incredibly reckless banks. They could have limited their taxpayers' liability and simply guaranteed deposits, not private bank bonds. And they could have ignored the banks' claim that allowing them to become insolvent would have destroyed the larger economy. In the Irish case, that claim was patently bogus, and the reader can't help wondering about American analogies.
Perhaps Lewis's most poignant conclusion is that "the strangest consequence of the Irish bubble [was] to throw a nation which had finally clawed its way out of centuries of indentured servitude back into it." But at least the Irish are left in no doubt about who was to blame, which is more than can be said for us.
One lazy afternoon in the summer of 2008, I was sitting in my parked car at Eastgate, while the family was out shopping. Maybe it was too hot and my brains were addled, or I was just bored I turned on my radio and hit one of those AM squawk radio stations, and who else was droning but, every moron's friend, Michael Medved. His guest that day was some poseur passing himself off as an economist, holding forth on the Irish economy and how it has these wonderfully low tax rates, and how we Americans - especially the rich and the corporations are taxed to death.
106,000,000,000 Euros = $ 152,272,180,000 at yesterday's rates, and not 10 trillion.
Manik,
Lewis was not talking about currency exchange rates. He was scaling by the relative size of the GNP of the two countries.
The Irish story is a sad one to read and a prime example of a country which gambled everything it had on one option, the boom in real estate.
The Irish banks gave large sums of money to developers across Ireland who have now filed for bankruptcy and leave the bank with incomplete developments with no market value.
This is yet another example of banks being allowed to loan huge sums of money whilst holding very little capital to provide for bad debts on such loans.
Greece and Ireland are relatively small economies. So its obvious that Italy is the problem right now. Italy is the 3rd economy in the Euro-zone. Is it a "Too big to fail" v2011? I don't thing so because Germany will not let it happen. But how long can Germany save the building from collapsing? Not to long. IMHO, eventually we will see a deep global recession. It will take some time before it happens, but the beast had already been released. Governments debt pyramids will fall sooner or later.
in my opinion all european countries are paying for a debt that US banks created with their irresponsible behavior, of course european banks have their share of guilt, but the big problem was in the US banks given money away to the real estate. And now we all pay for that, pitty to see Obama telling the american people that they are not like irland, greece or portugal, real pity because they should be even worse than everybody else... but ok. they are the kings of economy right? well i think this a subject in witch we could your story is very interesting, i stumble upon ur site and couldn't stop reading it, very nice adventure u r living. portuguese people are usually nice ( i am portuguese ) but we drink a lot of alcohol. hope u have fun for the rest of ur holidays, and if u have a chance visit this portuguese chat about it for a few months and still no agreement on that.
The rating agency Moodys has downgraded Portugal to Junk. It is unfair. But what is actually more unfair is the fact that the US are actually in a similar situation to that of Portugal or Ireland. And still they mantain the AAA rating.
As such they are reliable while other contries in Europe are not and are agravated their finantial conditions for it.
And now we see that the US rating has been downgraded. I believe that it is only a matter of time before the world economy will collapse.
Yes precisely. The bail outs are good for the banks and are coming at our expense. We should let the banks and speculators go out of business. The economy will go through a share but short decline and Governments can spend money on feeding the impoverished in the mean time.
Woke up this morning and watched the news. This world economy is going down the tubes. I didn't realize the Irish economy was in dire straits as well. I didin't realize they didn't have a non recourse home mortgage. Greece falls of next and then ireland will follow. Thanks or sharing this post as it looks like you posted it in June and your projections are right on thus far.
I didn't know Ireland will be next...I am irish and i really think Ireland situation is not that bad....But it seemsthat i am wrong..
I hope that Ireland and the others EU countries will do something to stop this crisis..
Let's hope Greece will be the last one so Europe can stand up again and build something good.
Irish people move out of their country in quest for a better life. They run from the crisis in their country.
People from other countries move to Ireland in quest for a better life. They think they have come to Heaven.
A crisis differs from a crisis. For some Europeans, rethinking the vacation from Carribean to Mediterranean is already a crisis. For some others, getting a chunk of bread is the end of crisis.
Can I personally do something to overcome the crisis? Oh, yes. I will use bicycle instead of car whenever possible.