[Marxism] Krugman: If bailout-fueled minibubble pops, harsh austerity likely next
ffeldman at bellatlantic.net
Mon Apr 20 19:31:30 MDT 2009
The parallel with Ireland is not precise because Ireland is a semicolonial
country with a section that is still colonized. But I think the references
to how bankers function have validity. His point is that if the huge pouring
of money into coffers of the financiers does not stabilize the system,
attempts to stimulate by other kinds of spending may then turn out to be
politically impossible -- from the standpoint of a government that serves
the capitalists, that is -- because of financial-sector driven budget and
And despite the current shaky minibubble, almost inevitable given the
stuffing of trillions into big capital's pockets, I see no sign whatever at
present of a recovery taking hold. Quite the contrary. Today's Wall Street
Journal reports that bank lending is down 23 percent since October, when the
first bailout had already been adopted.
April 20, 2009
Erin Go Broke
By PAUL KRUGMAN
"What," asked my interlocutor, "is the worst-case outlook for the world
economy?" It wasn't until the next day that I came up with the right answer:
America could turn Irish.
What's so bad about that? Well, the Irish government now predicts that this
year G.D.P. will fall more than 10 percent from its peak, crossing the line
that is sometimes used to distinguish between a recession and a depression.
But there's more to it than that: to satisfy nervous lenders, Ireland is
being forced to raise taxes and slash government spending in the face of an
economic slump - policies that will further deepen the slump.
And it's that closing off of policy options that I'm afraid might happen to
the rest of us. The slogan "Erin go bragh," usually translated as "Ireland
forever," is traditionally used as a declaration of Irish identity. But it
could also, I fear, be read as a prediction for the world economy.
How did Ireland get into its current bind? By being just like us, only more
so. Like its near-namesake Iceland, Ireland jumped with both feet into the
brave new world of unsupervised global markets. Last year the Heritage
Foundation declared Ireland the third freest economy in the world, behind
only Hong Kong and Singapore.
One part of the Irish economy that became especially free was the banking
sector, which used its freedom to finance a monstrous housing bubble.
Ireland became in effect a cool, snake-free version of coastal Florida.
Then the bubble burst. The collapse of construction sent the economy into a
tailspin, while plunging home prices left many people owing more than their
houses were worth. The result, as in the United States, has been a rising
tide of defaults and heavy losses for the banks.
And the troubles of the banks are largely responsible for putting the Irish
government in a policy straitjacket.
On the eve of the crisis Ireland seemed to be in good shape, fiscally
speaking, with a balanced budget and a low level of public debt. But the
government's revenue - which had become strongly dependent on the housing
boom - collapsed along with the bubble.
Even more important, the Irish government found itself having to take
responsibility for the mistakes of private bankers. Last September Ireland
moved to shore up confidence in its banks by offering a government guarantee
on their liabilities - thereby putting taxpayers on the hook for potential
losses of more than twice the country's G.D.P., equivalent to $30 trillion
for the United States.
The combination of deficits and exposure to bank losses raised doubts about
Ireland's long-run solvency, reflected in a rising risk premium on Irish
debt and warnings about possible downgrades from ratings agencies.
Hence the harsh new policies. Earlier this month the Irish government
simultaneously announced a plan to purchase many of the banks' bad assets -
putting taxpayers even further on the hook - while raising taxes and cutting
spending, to reassure lenders.
Is Ireland's government doing the right thing? As I read the debate among
Irish experts, there's widespread criticism of the bank plan, with many of
the country's leading economists calling for temporary nationalization
instead. (Ireland has already nationalized one major bank.) The arguments of
these Irish economists are very similar to those of a number of American
economists, myself included, about how to deal with our own banking mess.
But there isn't much disagreement about the need for fiscal austerity. As
far as responding to the recession goes, Ireland appears to be really, truly
without options, other than to hope for an export-led recovery if and when
the rest of the world bounces back.
So what does all this say about those of us who aren't Irish?
For now, the United States isn't confined by an Irish-type fiscal
straitjacket: the financial markets still consider U.S. government debt
safer than anything else.
But we can't assume that this will always be true. Unfortunately, we didn't
save for a rainy day: thanks to tax cuts and the war in Iraq, America came
out of the "Bush boom" with a higher ratio of government debt to G.D.P. than
it had going in. And if we push that ratio another 30 or 40 points higher -
not out of the question if economic policy is mishandled over the next few
years - we might start facing our own problems with the bond market.
Not to put too fine a point on it, that's one reason I'm so concerned about
the Obama administration's bank plan. If, as some of us fear, taxpayer funds
end up providing windfalls to financial operators instead of fixing what
needs to be fixed, we might not have the money to go back and do it right.
And the lesson of Ireland is that you really, really don't want to put
yourself in a position where you have to punish your economy in order to
save your banks.
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