Krugman and Dean Baker on the Irish money crisis

Paul Krugman’s article, “Eating the Irish”, explain the Irish problem very succinctly. A few quotes should suffice (as always it is better to read the entire article):

“The Irish story began with a genuine economic miracle. But eventually this gave way to a speculative frenzy driven by runaway banks and real estate developers, all in a cozy relationship with leading politicians. The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.”

The bubble burst, whereupon, as Krugman says, one would have expected that those who lent money to the banks to share in the pain.

“But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.”

To assure the markets of Ireland’s creditworthiness, a harsh program of spending cuts was initiated.

The result is a severe recession with falling incomes and increased unemployment. The markets are therefore not assured but scared because the austerity measures are depressing the economy.

Krugman notes that Iceland is riding out a similar situation and seems to be in better shape than Ireland, partly because Iceland is ‘allowing’ foreign lenders

“to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.”

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Dean Baker elaborates further in his article “Ireland should ‘do an Argentina'”.

He notes that Irish unemployment is 14%, and as a result of spending cuts and tax increases demanded by the bailout, will in all likelihood increase.

Further (Americans, listen up, LSW):

“While it is often claimed that these institutions are not political, only the braindead could still believe this. The decision to make Ireland’s workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country’s bankers is entirely a political one. There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.”

Baker points out that Argentina was in a similar situation in 2001 and the IMF pushed for similar austerity measures which resulted in GDP going down by almost 10% and an increase in unemployment into the double digits.

“By the end of the 2001, it was politically impossible for the Argentine government to agree to more austerity. As a result, it broke the supposedly unbreakable link between its currency and the dollar and defaulted on its debt.

The immediate effect was to make the economy worse, but by the second half of 2002, the economy was again growing. This was the start of five and a half years of solid growth, until the world economic crisis eventually took its toll in 2009.”

LSW recommends that both Baker’s and Krugman’s articles be read to gain an understanding of both Ireland’s problems and, it would seem to LSW, aspects of the financial problems facing the U.S. as well as solutions being proposed.

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