Wednesday, December 1, 2010

Ireland Versus Iceland

There is more to differentiate these two countries than just one letter. Iceland chose not to bail out it's private banks when they went mad and pursued bankruptcy through corrupt lending. Ireland is wrecking it's economy and it's people's lives by converting private debt to public obligations. In order, amazingly enough. to "save the system." What is happening in Ireland will happen in the US, one day soon enough. What should happen in the US is what did happen in Iceland. We are told our social services, as feeble as they are, need to be eliminated to pay for the bankers' follies. Amazingly enough the peasantry is going along with this cockamamie plan. From zero hedge, two points of view:

Ireland, please grow some balls and make my heritage proud. Default on the god damn debt. Bank bondholders and sovereign bondholders are NOT special - repeat after me - they are NOT special. Default for the sake of the people. Follow the actions of Iceland on the road to national sovereignty.

Ireland would save the world from much misery by defaulting now and driving the vampire banks into liquidation.

The alternative title for today entry is: Ireland, please drive a stake through the heart of the vampire banks which have the world by the throat. The entire controlled demolition of the Eurozone's finances can be summed up in one phrase: privatize leverage and profits, socialize losses and risk.

The basic deal is this: protect the bank's managers, shareholders and bondholders from any losses, while heaping the socialized losses and risks on the taxpayers and citizens.

While there are murmurings of "forcing bondholders to share the pain," any future haircut will undoubtedly be just for show, while the Irish pension funds are gutted to bail out the banks.

It's rather straightforward: as asset bubbles rise, they enable vast leveraging of credit and debt. Once mal-invested assets collapse in value, then the debt remains, unsupported by equity or capital.

As the Financial/Political Elites transfer these catastrophic losses onto the citizenry, they set off a positive (runaway) feedback loop: the Central State austerity required to pay the borrowing costs of the bailout sends the economy into recession, which reduces borrowers' incomes, triggering more defaults which further sink housing prices. As prices continue falling, bank capital declines, requiring ever-larger bailouts to provide the banks with a simulacrum of solvency.

Austerity measures must be tightened to channel more of the citizens' incomes to the banks, which further suppresses the economy, lowering tax revenues and incomes, which leads to more austerity to fund more bailouts, and so on, until the haggard remnants of a once-wealthy citizenry finally rebel against their Financial/Political Overlords and topple the government which arranged the bailout.

A new populist government announces a sovereign default, to widespread huzzahs from the unyoked citizenry.

The EU's bailout of Greece and Ireland will only hasten this dynamic. The Power Elites are rapidly losing their credibility; just compare the market's euphoric reaction to the Greek bailout in May and the openly negative response to the Irish bailout.

The money is lost, and Capitalism requires those who took on the risk to earn outsized returns must take the loss, come what may. When a nation such as Ireland is running a State deficit equal to 32% of GDP, austerity cannot generate the stupendous surpluses needed to make good the vast sums which are already lost.

And even if they could, why should the citizens save the banks and bondholders from the losses Capitalism requires? Mal-investments should be sold, for pennies on the dollar if need be, insolvent banks liquidated and bondholders handed 95% losses. Managers would be sacked, bonuses cancelled and shareholders wiped out.

It's a little late to decide Capitalism is only fun when reaping gargantuan profits from highly leveraged mal-investment and fraud. Ireland, and indeed the world, will survive if all the vampire banks are liquidated. That is the end-state, and "buying time" just increases the misery of the citizens who have been yoked to save their "betters."

Ireland, please drive a stake through the heart of the vampire banks which have the world by the throat. By defaulting, you would be doing the world (and your own nation) an immense favor.

Iceland is No Ireland

Inquiring Irish minds just might be interested to see how Iceland fared after they told EU bankers to go to hell.


Iceland’s President Olafur R. Grimsson said his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued.

“The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”

“How far can we ask ordinary people -- farmers and fishermen and teachers and doctors and nurses -- to shoulder the responsibility of failed private banks,” said Grimsson. “That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”


Karl said...

Only a solid statist could support the taking of even more private property to expand our "feeble social services" in addition to the felonious confiscation of private property to pay for the banking meltdown.

Well played comrade!

Conchscooter said...

Dear Karl,
Time for you to man up and find something interesting to say. Calling me a statist and making puerile comments about Communism (ooh scary!) is not interesting to me. And like the Stasi I will hit the delete button and eliminate your next comment that fails to meet these guidelines. Dictatorship has it's privileges.

Karl said...

Oh Conch you silly goose! As evidenced by the precipitous drop off in comments on this site (dare I say "echo chamber"?...) you obviously have no interest in divergent points of view or lively discussion anyway.... so why should potential posters bother? Your Stasi oversight has yielded results consistent with other places it's been used... a dead, barren landscape.
Feel free to delete (ooh! scary!)dissenters with impunity.. or better yet, lock out all posts as you've done before! Brilliant! ....but then again, who'd know? Who'd care?

Conchscooter said...

As a "divergent point of view" that comment left quite a lot to be desired. So, do you think Ireland should default or cripple it's people trying to pay off the bankers' debts that the government has agreed to cover? Why?...

Karl said...

We would agree on this point, stakeholders (regardless of whether it's a bank, car company, or insurance company) should bear the risks of the investment decisions they make (be they stockholders, bondholders, or bankers), without the prospect of a gov't lifeline. It's a dangerous precident that rewards the wrong behavior. Iceland = correct. Ireland = wrong.