Below is my response to Peter Sutherland’s Address to the KBS on Friday, November 5th, 2010, on the occasion of the opening of the School.
Stephen Kinsella 11/3/10
[Notes to self: Running time Max. 4.5-5 minutes]
I’d like to sincerely thank Mr Sutherland for his speech. Mr Sutherland is one of Ireland’s favourite sons, in both the legal and the banking fields, and lends his considerable prestige to the opening of a business school that aspires to be world class.
Thankfully, he has demonstrated a commitment to public service here in Ireland and at the EU, as well as retaining a keen interest in education in Ireland. Thanks to the Sutherland law school in UCD, the Sutherland Centre in TCD, and others, Mr Sutherland is a one man Keynesian stimulus package for brass plate makers.
It is clear from his eloquent speech, and indeed from the trajectory of his remarkable career, that Mr Sutherland is a classical market liberal in the tradition of Smith, Hume, and Ricardo. He feels the ‘dead hand’ of the State should be removed whenever possible, and that fundamentally, for countries to prosper, they must practice openness and competition to foster economic growth, which will increase the wealth and living standards of the citizens of the nation. Thus the espousal of the policy, seeded under Lemass and brought to fruition two political generations later, of export-led growth, the vision given flesh of Ireland as a multinational export platform, a gateway to the Single Market. During the dark days of the 1980s, the lead up to the creation of the Single Market, which Mr Sutherland championed as part of the Delors commission, created a surge of investment from abroad, especially the US. The EU doubled its structural fund expenditure in 1989, giving Ireland a Keynesian stimulus, of sorts, for our infrastructure. It’s no exaggeration to say Peter Sutherland helped sow the seeds for the Celtic Tiger.
This policy of openness has yielded concrete results: 5 of the top 25 global medical technology firms are located in Ireland; 8 of the top 10 in pharmaceuticals; and over half of the world s leading financial services companies have a foothold in Ireland. Exports grew by more than 50% in nominal terms in the past decade, but no net jobs were added in both the foreign-owned or indigenous exporting sectors. Yet for some reason, rising exports--which multinational firms are overwhelmingly responsible for--are unquestioned, and unquestionably seen as an engine of growth.
The choice, he feels, to be open, to be connected with the ebb and flow of world commerce, is a choice between living well, and living poorly. It follows naturally that problems like excessive or inappropriate interference from the State must be removed, or resolved: they are the dead hand of wasteful corporatism.
Not so.
The problems Ireland faces today are not a result of poorly managed market forces, but the result of market forces, pure and simple. Credit-driven markets create their own reversal. They are highly volatile, and they have been for 800 hundred years. Left to themselves, markets experience cycles. They boom. They bust. History has shown us that when economies embrace market liberalism, even of the classical sort, societal damage is done by the excess volatility of investment. Society is transformed, for better and for worse, by the process. Liberal markets destroy as much as they create. As Fianna Fáil are about to find out, market liberalization also generally obliterates the political party or movement that champions free market reforms, once the scale of the inevitable cyclical downturn is apparent to the populace.
Market liberalization is an object lesson in the old saying that nothing is ever learned for long. So it was in the UK under Thatcher, so it was in New Zealand, so it was in Mexico, so it will be in Ireland.
Don’t get me wrong. Markets are powerful engines of growth, because what they do is to create the competitive pressures to innovate, but free markets are not independent of the societies in which they are constructed. Legislation and regulation create free markets. Varieties of capitalism abound, and the version currently being experimented upon in Ireland is reducing a sovereign state to a poor periphery. We are not California. We are Ireland. I’m a citizen, not a subject.
We are told the budgets of the next few years must be deflationary, because we must establish “credibility”. The country, so the story goes, is broke. We must reduce the difference between our receipts and expenditures, or else fall off a funding cliff when markets refuse to supply the difference. It is salutary that we had already arrived at this point in October. But if nothing is learned for long, it is clear that it takes our policy apparatus far too long to learn certain basic facts: the country has stalled, the budget is our last card to play in the credibility game, and markets fear it will be a bluff.
Our 6 billion Euro adjustment is a bluff. Look at the detail supplied: even with the €6bn taken out of the economy, the 2011 Exchequer balance will be exactly the same as in 2010: €19.25bn deficit in cash terms. Of the total €6bn in cuts, nearly €3.1bn will go towards covering the losses of our wayward banks, with a further €1.25bn put up to cover interest on the banks’ rescue notes. Our current expenditure will therefore not fall next year—it will rise from €47.25bn in 2010 to €49.75bn in 2011. Current revenue will fall by €500 million, leaving our current budget balance at -€16.25bn---deeper than the -€13.5bn achieved this year. We require robust growth to get ourselves out of this mess, and robust growth is exactly what we are conspiring to destroy.
Our much-vaunted “credibility” is shot because we refuse to recognize reality. AIB this year made a €3bn euro provision for band debts on its €81bn euro Non-NAMA loan book. Anyone who suggests AIB will lose just under 4% on a very shaky loan book must be dreaming. Anyone who believes pumping 7 billion euros of taxpayer’s future earnings into AIB must be having a nightmare.
The drive for credibility amongst markets is a red herring. Logically market participants seek risk for return: offer them that and they’ll be happy. The prospects of Irish default are unfortunately too high now. Ireland must default on its debt, it must enter the embrace of the EU/IMF, and it must do so under stringent conditions.
Anyone interested in the chequered history of the IMF’s adventures in damaged countries can consult Nobel Laureate Joseph Stiglitz on the topic. The EU/IMF solution is really just front-loaded pain, a more severe version of the ‘medicine’ being advocated by the government at the moment, yet more liberalization for liberalisation’s sake. We’ve seen where that roads leads.
Let me offer an alternative, which unfortunately involves biting the hands that currently feed us: the markets.
You can’t escape the damaging balance sheet effects of the boom without debt write downs, and that means burning bondholders, something government and the markets clearly don’t want us to do, but that independent observers from the FT to Reuters to the IMF now consider essential. They are saying, in effect, for market participants, who sought risk and reward in open markets, to take their lumps. Ireland has to take its lumps too, I think we all recognize that. But continually bailing out dead banks and failed businessmen while investment in the real economy suffers is a step too far. We have tried that approach, it has clearly failed. The only credible alternative is roasting bondholders on an open fire, and bearing the pain of the inevitable macroeconomic adjustment. I’ll bring the marshmallows.
Let me close with a word on the late Jim Kemmy. Kemmy recognized and appreciated that the unrestrained free market was not the answer to Ireland’s problems, but market capitalism was and is the main engine of economic growth and development, distributing benefits to all citizens, if unequally. Kemmy was a European, as Mr Sutherland is. The KBS has a `commitment to teaching the benefits of market capitalism, as well as its costs. I think the legacy of Jim Kemmy is to recognize the limits of markets, and that’s why I’m proud to work in a place with his name on the door.
COULD WE HAND OVER CONTROL (REIGNS) TO THE EU ie GERMANY. MAINTAINING AN 80% WORKFORCE OF IRISH NATIONALS IN THE PUBLIC SECTOR, SO THAT WHEN, WE LEARN FROM THEM HOW TO INSTRUMENT STRUCTURES/SYSTEMS AND PROCEDURES THAT WE COULD EVENTUALLY TAKE CONTROLS OF THE REIGNS BACK AGAIN?
How would we take the reins back?
Well it's probably going to happen anyway, so we should at least be up for it. When i say 'take back' what i mean is to be trusted with them. Once all of are present 'good old boys' have been flushed out and relevant other wasters gotten rid of. Systems etc would be set in motion. Competent individuals, like yourself, who are not politicians, but experts in their field would be employed as, lets say understudies, and eventually trusted to run the country in an organised manner. We need these individuals from every field. Our problems don't end at our financial status but go right down to the core of society. Even though we have individuals who are capable of doing a good job now. We are not capable of getting rid of the waste. We have to seen to be compliant. I'm not worried about myself, but our kids and for future generations. Would it, in 50 years time, having the same standard of living as e.g. Germany be such a bad thing.
Reading Morgan Kelly in the IT today, think we might already be there!
would leaving the eurozone be such a bad thing??especially in the current situation that ireland finds itself in.being able to devalue our own currency would reinforce exports(other countries have already done this to protect their own exports).being able to print money?being able to control our own interest rates?in twelve months germany and france might want the ECB to rise interest rates and ireland will still be in the same hole.thats not going to help a struggling economy.
Im not saying we should leave the EU but being part of the euro does not help a country with a struggling economy.Am I wrong?? Rant over
Is it too late now to burn the bondholders now since €55 billion worth of bonds were paid off in September
Europe will hardly let us default on the ECB?
@T at this stage all options need to be considered, but the costs to resetting a currency are enormous, as are the time lags involved in setting one up, so we'd need to think about that very carefully.
@Scarface, never say never.
Thanks for your comments!