Dublin Opinion

Simon Johnson is a former chief economist at the International Monetary Fund, and considering that organization’s history of imposing austerity measures for the support it provides and condemning ‘emerging’ countries to decades of economic misery in order to support the banks in the developed world that got them into the mess in the first place you would imagine that what he has to say about the economic crisis should be received cautiously.

In a widely quoted article from May 2009, The Quiet Coup, in the Atlantic Magazine, however, it became clear that his experience trouble-shooting crisis economies has given him a perspective that avoids all the spin that government ministers and their economic ciphers foist on us all too regularly. In that article he talked about oligarchs in Russia and how local power was used by elites for personal enrichment in way that could be easily applied to Ireland.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse.

Today, in his own Baseline Scenario blog and more fully in the Economix blog in the New York Times he and Peter Boone talks specifically about Ireland, and its current problems. Once again, he cuts through what our homegrown mainstream economic commentators have been denying.

Worth quoting a large chunk of, I feel.

The remarkable success of this tax haven means that roughly 20 percent of Irish gross domestic product is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base. A more robust cross-country comparison would be to examine Ireland’s financial condition ignoring these transfers. This is easy to do: a nation’s gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are nearly identical, but in Ireland they are not.

When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected — by our calculation — to be 97 percent, and 109 percent at the end of 2011. These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt.

Ireland’s politicians, rather than facing up to their problems, are making things ever worse. Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly. The biggest banks grew to have assets twice the size of official G.D.P. when they essentially failed in 2008. The government has now made a fateful choice: rather than make creditors pay some part of the losses, it is taking the bank debt onto the national balance sheet, effectively ballooning its already large sovereign debt. Irish taxpayers are set to be left with the risk of very large payments to make on someone else’s real estate deals gone bad.

There is no simple escape, but if the government hopes to avoid a sovereign default, the one overriding priority should be to stop bailing out the banks. Instead, the government should wind down existing banks in a “bad bank,” while moving their deposit base and profitable businesses into new, well-capitalized banks that can function without a taxpayer burden. This will be messy, but it is far better than a sovereign default.

Second, the Irish must take the tough fiscal steps that will be required under any circumstances. The International Monetary Fund and the European Union have made clear that funding is available to Ireland — so the government should use this to bridge the tough journey of fiscal cuts ahead.

The final suggestion is that Ireland leaves the Euro. Considering what the EU Commission have planned for us, that’s not a bad idea.

Here’s something else entirely, to lighten the mood perhaps.

A Pre-make: The Empire Strikes Back as a 1950’s 3-D movie.

Enjoy!