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Irish political economy seems to be falling apart in front of our eyes and the bond market isn't so happy, even after Ireland accepted the EU/IMF bailout. That would appear to be political risk. Maybe they're won't be a happy ending even in the short run.
Here is Thomas Friedman, a number of years back, touting the wonders of the Irish model. Cato and Heritage made similar claims. What are we to make of this broader span of Irish history? I see a few candidate views, not necessarily mutually exclusive:
1. The Irish had some excellent economic policies, but they needed to regulate their banks more. They were simply too optimistic and too sloppy.
2. Irish troubles could have been contained, at some point over the last two years, had Ireland not been on the euro. They would have devalued, defaulted, and had a rapid bounce back up, within the next three years.
3. Ireland never should have guaranteed the liabilities of its banking sector. Indeed, Ireland (as New Zealand did long ago) should have encouraged larger, more diversified foreign banks to dominate its financial sector.
4. Irish troubles are intimately connected with low corporate tax rates. Revenue starvation induced the Irish government to court and tolerate a real estate bubble. One claim is that Ireland relied too much on property taxes.
5. The good and bad policies are a bundle of sorts, and Ireland needed the mix to rise from squalor and the dominance of anti-commercial interest groups, no matter how painful the present day may seem. I recall vividly, growing up, that Ireland was thought of as not much more than a Third World country.
6. We are overreacting to the Irish failure. It is one of the first European dominoes to fall, but over time many different policy models will look like mistakes.
What other candidate views are there?
Posted by Tyler Cowen on November 22, 2010 at 02:11 PM in Economics, History | Permalink
Definitely agree with #3. There seems to be an implicit assumption in the world today that all banks are guaranteed by their home governments. I don't see how a small country can possibly be home to a large bank under such a system.
Support for my view: Iceland and Ireland. Examples arguing against my view: Luxembourg and Switzerland. What have they done differently? (Or are they just next?)
Posted by: David Wright at Nov 22, 2010 2:18:19 PM
Let's take a trip down the memory banks of marginal revolution
I rather like the title "voodoo priest of free market economics" so I am happy to take the blame for the sub-prime mortgage defaults and at the same time stick a few pins in Nouriel Roubini.
Roubini and others generating hysteria about defaults in the mortgage market are credit snobs - they think credit is something that only the rich can handle. Just look at the language that Roubini uses to analogize borrowers - they are "reckless patients" who "spent the last few years on a diet of booze, drugs and artery clogging junk food." Similarly, the Washington Post tells us that it's the end of the "borrowing binge."
Yeah, we get it. Credit is ok for us, the "sober" borrowers but poor people can't handle credit. Too much credit among the poor generates decay and social pathology. Credit must be regulated. We can't, for example, have credit stores in poor neighborhoods. Don't you know that credit is bad for people without self-discipline? Let the poor buy on installment credit? That's unconscionable. Today's furor over sub-prime mortgages is the same old story.
Basic economics says that people should borrow so that they can consume based upon their permanent income. Modern day financial markets are finally making this possibility a reality. Combine financial innovation, strong US economic performance and a global savings glut and it makes sense that credit should become easier to obtain. We see the benefits of financial innovation in bringing credit to the poor not just in the United States but around the world. Will Roubini next be calling for the retraction of Muhammad Yunus's Nobel Prize?
The fact that there are defaults is partly a learning process in response to financial innovation, and thus evolution, but also partly a simple matter of risk. Defaults are to be expected. I see no reason to expect contagion. All lending statistics must now be marked to the global financial market which means that diversification is now more extensive than ever before and thus net risk is lower. Moreover, the whole point of recent financial innovation (and reformed bankruptcy law) has been to reallocate risk way from borrowers and towards those lenders in the world wide market for capital who are in the best position to handle the risk.
The democratization of credit worries the credit snobs. The credit snobs fear that capitalism isn't just for the rich.
http://www.marginalrevolution.com/marginalrevolution/2007/03/expensive_credi.html
Posted by: slim2120 at Nov 22, 2010 2:18:39 PM
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