The lesson of Ireland

In the NY Times today, Paul Krugman does a good job of explaining why Ireland is in deep trouble.  Unfortunately, Mr. Krugman draws the wrong conclusions from the Irish experience – he thinks we need to nationalize banks, when the lesson to learn is to not bailout private banks.

Mr. Krugman says 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.

Sound familar?  To me it sounds like the multiple rounds of bailouts that we’re doing in the US.  The sad part is that if the US and Irish governments would have simply let the bad banks fail, we’d be on our way out of this mess by now.  Instead, we’re sinking deeper and deeper into the private sector problems.

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.

Duh.  That’s what many of us have been saying for over a year.  The Chinese are eventually going to get tired of loaning us money to buy more stuff from them.  The US government debt will be paid eventually – but with inflated dollars.

And it all could’ve been avoided if we wouldn’t have started this whole bailout process.  Let the banks that took high risks go broke.  Let the companies and individuals who invested with them go broke.  The good banks (yes, there are some) would have bought those assets at a fire sale price and turned them into a profit center.  But now we’re all on the hook for the private sector losses.

Let’s call it “Going Irish”.  We can also call it dumb.



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