Mark Blyth on Ireland: The Circle will not be Squared

Mark Blyth, of Austerity fame and the Watson Institute, has a Scot’s vernacular gift for clarifying economics. Is the situation explosive? “You’ve got 300 million Americans and 500 million handguns. And 72 percent of Americans that live paycheck to paycheck. Do the math!”

We’re talking in particular about the Euro crisis spreading out of Ireland. Short form: tiny country, continental meltdown in the offing.

It was never a “Celtic Tiger,” in the first place, in the Blyth telling. “It was a small ocelot with a roar.” A population the size of Brooklyn, NY, producing about 2 percent of the European GDP. And now, in deep pain of cuts in education and health services, it’s having an utterly illusory shouting match, not so unlike ours in the US of A.

“People want to say: look at those profligate governments, spending all that money. We’ve got to restore fiscal sanity. But it wasn’t fiscal insanity that got us here. It was private-sector leverage and the insanity of banking that brought us to this point. So the bankers put it on the state, and the state turned around it put it on the taxpayer. It’s the biggest bait-and-switch in human history.”

As the Euro bankers try to transfer risk and responsibility for their crisis back and forth from private to “sovereign” public debt, I’m asking Mark Blyth — using Ireland as a manageably small example — to find the point where justice could be said to meet necessity. It turns out, he says, that there’s no such point. Not in sight yet, anyway.

The just thing is that the banks should pay. No question. You made the mess. Clean it up. It’s a pretty simple rule. But the basic line is this: if you let the banks fail, there’s nothing coming back. So if you’re Ireland, the Celtic Tiger, and over 10 percent of your GDP is in the financial sector, that’s where you make a lot of money, bankers’ salaries and all that. So let’s say you decide to blow up 10 percent of the economy. What’s your next trick? We can try to reflate it. We can hope that it comes back. We can hope to raise the patient from the dead basically. In order to do that you need to have a growing economy. So obviously hacking away at austerity politics is not going to bring back the bankers’ balance sheets. But on the other hand, it’s not clear what else you do with them. They don’t have any money to pay back, unless you bring the corpse back to life.

Now the only way you can do that is by having growth-enhancing policies, and that’s why austerity is not one of them. But there’s another short-run way you can do this. If you had to take all the debt off the banks and put it on the public balance sheet, thereby making the bondholders of sovereign bonds concerned about the value of their holdings, those sovereign bondholders are going to go to the EU and Germany, and remind the bankers in those countries about all the different bonds they’re holding in all these peripheral and non-peripheral countries, and say: do you want a bank run on this?

Because here’s the deal: if the Irish decide that they’re going to put it on the banks, and the banks can’t pay it — if they say: Screw it, we’re not going to take austerity politics anymore. Hell with it, we’re not going to do this! — okay, what’s your next trick, Ireland? Well, we’re going to default, we’re going to back out of the Euro! Oh, really? The minute I know that, I’m going to dump every Irish bond I can, and the minute I do that I’m going to look at my holdings in bonds and I’m going to say: there’s other guys out there. They can default, too, and probably the Spanish are going to go as well. So then I start dumping the Spanish and then the Portugese. And then everybody’s dumping all these bonds together. You’ve got a massive run that wipes out not just 2 percent of Europe’s GDP, Ireland. It basically takes out the European banking system.

So from the point of view of Europe and the Germans in particular, they’re saying to the Irish: You’re not going anywhere, Ireland. And you’re taking this austerity, and you’re going to like it! The only problem is: they’re not going to. There’s a democracy in Ireland. They’re going to vote the rascals out. And when they vote them out they’re going to get a government that says: maybe the banks should pay for this. And then you’re back to your problem: the banks don’t have any money left. So how are you going to do it? You can’t square a circle!

Mark Blyth with Chris Lydon at the Watson Institute, Brown University, November 30, 2010

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  • shwabee

    This was such a great interview. I now check for these podcats regularlyn and listen just about every week. Thanks.

  • Bryon

    Magnificent guest Chris!!

  • This is telling the unadulterated Truth!

  • This guy is telling the Whole Truth and Nothing but the Truth!

  • This is the best and most useful news piece I have heard since all these global meltdowns began. Thank you.

    I just wish there were a way to keep the burdens off the citizens. As a hooker (crocheter) of hats, it seems like the world-wide fiscal crisis really has begun to hit home, no matter who says they are “fixing it.”

  • Eenusch

    Just fantastic…and a wonderful antidote to the nuts on both the left and right who have screamed, “no bailouts for the fat-cat banks”. Not so easy as Mark Blyth explains.

    I’m surprised that Mark didn’t talk about spreading the pain throughout the entire society through money printing and inflation.

  • brick

    Thanks for this piece! Mark gave a lot of information on the European banking issues that were not so clear to me after months of following this story.

    Sounds like although the U.S, stock market is going up, the bond house of cards is still under lots of stress. I’d love to hear other economists and their prognoses and how they respond to Mark.

    Stimulus sounds good as a start to raise the treasuries of nations but it also sounds like it will not be sufficient.

    Inflation comes from too many dollars chasing too few goods and services so as long as the stimulus has a multiplicative effect on the creation of goods and services then inflation can be controlled.

    On the European banking, What will trigger the restructuring of the debt and is there an orderly way for that outcome to occur without a crash happening first?

    Thanks for airing this Christopher. Keep up the great stuff.

  • http://www.independe…ly-2448878.html

    Hate to say it but he could be on to something. There has been a swing to the ‘crackpot’ left in Ireland. Some of the fringe left (for the first time) may actually have a stab at becoming one of the minority members of government. This is genuinely scary (from the point of view of what they would do to the economy). I am keeping my passport handy.

    Staying short euro here.

  • Potter

    GASP! Complicated. Thick Scottish beautiful! Krugman definitely necessary for dismal science 101 ( though he’s not too simple either). Perilous times.

    thank you!

  • YahooSerious

    No amount of spin or lying will change the facts. The hens all come home to roost and the sun is starting to set. Get ready for a wild ride…

  • YahooSerious

    Peter, don’t bother coming to America…its the right that are destroying this country…

  • orangescissor

    Welcome to zombie debt – the debt that you cant pay off. Now u.s./euro governments now facing this, but you can ask anyone who has lived with IMF and World Bank trade policies in the developing world for the last 40 years and it wouldn’t be news to them. That’s the terrifying part.

  • ray hat

    This subject needs a much greater understanding of how money is created and distributed. What the world is facing is a crisis created for a purpose, that is to create new global institutions, world bank, world government, NATO and the UN to name but a few. If this were left to a political process we would probably say no. So what is to be done, look to Germany and their extensive experience in local/complementary currencies. To date there exists more than 40 local systems some simple some extensive, substantial and doing good work for peoples daily needs. A useful statistic to bear in mind is this: of the money supply 100% only 3% is needed to service our daily needs, the remainder, 97% ,is about global speculation. So who has a problem, the people or the banks? Check out “regiogeld” (regional money) and find out that those canny Germans don’t fully trust the Euro either.

  • Xlp Thlplylp

    The investment banks should have been split into two banks: those with bad investments that had nothing to do with payrolls, savings and pensions, and the rest. The new good banks could have been recapitalized, and the bad banks left to rot. It’s astonishing that this possibility wasn’t mentioned by our glib guest.

    As for sovereign debt holders taking haircuts, there is a simple and effective inducement: extradite the banking executives responsible to the sovereign nations they defrauded to stand trial. If the United States cannot indict anyone because it won’t pay, then find a legal means of redress that will: extradition of bank executives in return for sustainable levels of debt. I doubt that any administration cares whether the public or some bank executives get sold out in the national interest.

  • Seanán Kerr

    “They’re going to vote the rascals out. And when they vote them out they’re going to get a government that says: maybe the banks should pay for this.”

    Ha! Ha! Ha! Oh if only. We have civil war party politics in Ireland, you vote out centre-right bank loving party, you get the other coming in doing the exact same. Nearly three years later, same mess, more austerity, more debt, and failed politician Oli Rehn insisting we stick rigidly to the terms Troikas suicide pact.