Yet another rant about the economy

A READER WRITES: “You have not provided us with a rant about the economy for a couple of days now. I miss it. Please rant”.

BB SAYS: Ok, ok. But this is the last one. No seriously. I promise. This is my last word on the matter. From now on I won’t be mentioning it again. Honest. I’m boring even myself at this stage.

The predicted German bailout of Ireland is now being talked out openly:

“The German finance minister is raising the prospect of a rescue becoming necessary. While declining to identify countries facing problems, the German finance chief said Ireland, which has a widening budget deficit, is in a ‘very difficult situation’”.

Of course, Ireland is already being kept on life-support by the European Central Bank in Frankfurt:

“The ECB is able to get cash indirectly to countries by buying bonds under repurchase agreement in the secondary market. The ECB does not make public what bonds it holds and that made it unclear which countries, if any, might already be receiving this form of indirect help. But Mayer said he thought some countries were.”

Ireland is. The ECB presumably has reasonably reliable information about the real condition of Irish banks – I would imagine that Anglo Irish Bank has virtually no deposits (what rational person would have their money there?), and billions of loans owing to foreign banks that neither it nor the government will be able to pay back. The other Irish banks are not that far behind Anglo Irish Bank. Ireland borrowed billions from abroad to build and buy property - if banks increase lending by 20% then house prices go up by 20%. Now, if people think house prices are going to keep going up, the link between house prices and household income is broken – until such time as the bubble bursts, and then the link is re-established. Household incomes in Ireland are not nearly as high as people think, and they are falling fast.

As I wrote to a friend on the 9th of January 2008: “The big problem in Ireland is new financial instruments such as 35 year mortgages, or 120% mortgages and so on. On the face of it, people might think that 35 year mortgages are good for house-buyers because they allow them to buy a better, more expensive house. But all it does is allow everyone to get a bigger mortgage, thus driving up the price of houses for everyone. So the purpose of financial instruments like 35 year mortgages is to get ordinary people deeper in debt, to push up house prices, and benefit banks and above all builders. The Irish government has connived in all of this deliberately, in order to keep its biggest donors happy. The people who lose out the most from these scams are young people who either can't afford a house, or who have to plunge themselves into a life-time of debt in order to get a house”.

Much of the borrowed money will never be paid back. So now nobody will lend to Ireland except the ECB (indirectly). But don’t think for a second that any bailout will not come at a price. The people who provide the bailout dictate whatever terms they want, and the recipient country has no choice but to obey. When countries are bailed out the quid pro quo is always the same: huge increases in taxes and murderous reductions in public spending.

Some commentators are worried that the Irish economy now faces a Japanese-style “lost decade”. Certainly, house prices in Japan fell for 14 years in a row after its bubble bursts in the early 1990s. But unemployment only rose to 5 percent in 2001 from 2.1 percent in 1990. Its economy expanded in all but two years (1998 and 1999). In Ireland unemployment is going to rise to at least 12% this year and GDP is going to fall by 6% at least. The government’s tax revenue will be decimated. Nothing like this ever happened in Japan’s “lost decade”.