There is currently a series of commercials on American television promoting an operating system used in many of the new smart phones. In one version of the ad there is a man standing at a urinal, relieving himself using one hand and texting with the other. He drops the phone. As he bends down to pick it up and presumably resume his one-handed typing a man a few positions down looks over, wrinkles his brown and says “Really?!” The message is that we all have better things to do than stare at what comes over our electronic devices. The world full of people is worth our attention. Interesting idea.
Perhaps the most ominous part of Ireland’s proposed austerity plan is the decrease by €1 in the minimum wage. When you first read that number is doesn’t seem so bad – it’s only a 1/one. That’s until you remember that the minimum wage is expressed in compensation per hour. Then the 1/one becomes much larger. It is equivalent to an 11.5% decrease in gross income. Take a moment and think about what a reduction of that amount would mean to you. Think of the conversations that would happen between you and those you care about, between you and those who depend on you.
The somewhat better off - those earning the equivalent of $67,000 - would experience a $5,700 reduction in gross income according to John Burn’s article in the New York Times or slightly under 9%. Those conversations don’t seem any more appealing. The Irish are stunned. What happened to the Celtic Tiger? What happened to the economy that for the first time in memory reversed the trend from emigrating elsewhere to returning home to share in the revitalized economy? Is Ireland the same as Greece?
Actually, Ireland is not the same as Greece. The Greek government had a very large Ponzi scheme going on. By all accounts, the Irish government was, from a financial perspective, well run. It is the Irish banks and their disastrous balance sheets that are the source of the problem. The banks made loans and investments that went south and the conventional wisdom is that the government should bail them out. It is similar thinking to what lead to the infamous TARP legislation in the United States.
The problem that we are facing is that the conventional wisdom is looking less wise with every passing day. The first crack in the idea that banks should be bailed out by governments came with the expression “privatizing profits and socializing losses” that began appearing in the media several years ago. In the United States, members of Congress who voted for the TARP funds were ripe targets for those who thought that lending money to failed institutions ran afoul of free market principles.
The western banking system is a private system. The Federal Reserve, the central bank in the United States, is owned by the chartered banks of the United States. The Federal government has no equity stake, no ownership of the Fed. With some nuance, the same situation exists within the European Central Bank and the countries in the EU. It is not just the management of monetary policy that is in private hands (and therefore allegedly immune to political influence); it is the creation of money itself.
That this structure is just now being understood by more and more people is the subject that leads us down all sorts of unpleasant paths. I have friends who are conspiracy theorists. Their views range from the fantastic to the fatalistic. To the degree that they get people interested in what is going on, they have a positive influence. To the degree that they convince us that we are victims of forces more powerful than we can conceive, they are destructive.
It might make more sense for the central banks to bypass sovereign governments and recapitalize their member banks directly. As a matter of fact, that’s what occurs for the most part anyway. The Federal Reserve has been funneling money into the US banks in amounts that dwarf the TARP funds. But taking that approach would shatter the myth that governments have much of anything to do with monetary systems. The problem in these situations is that the people most invested in the myth continue to believe it long after they are in a tiny minority.
As the ink barely dries on the proposed Irish debt agreement with the IMF and the ECB, we are hearing that Portugal and Spain are next up. We watch the finance ministers of both countries try to respond to questions equivalent to “When did you stop beating your wife?” Many of us could actually write the stories that will appear in the financial newspapers about the collapse of Portugal and Spain right now. They are predictable. What is not predictable is how people will respond.
It’s always been my experience that just when you think there can’t be any alternative to what you expect to happen, an alternative appears. So will the three countries subject themselves to draconian cuts in their budgets and standards of living one after another? Will we see a few street demonstrations, some smashed cars and then a close vote in the government to implement an austerity plan? Perhaps. But if my father’s side of the family is any indication, the Irish can be a difficult lot. They might surprise us and do something worth paying attention to – really!This guest blog was first published on Sorms.blogspot.com.
Tags: austerity measures , banking , banks , Federal Reserve , financial crisis , Ireland , Irish economy