Nah. It’s probably my mind playing tricks on me. That happens to senior citizens sometimes. Or maybe it’s because I don’t have one of those “Piled higher and Deeper” (PhD) certificates in economics. I don’t know. I’ve read his NYT article “Eating the Irish” three times and I keep coming to the same conclusion. He appears to be saying that the Irish should have let their banks fail while I seem to recall that he applauded the bailout of the our banks.
I’ll share some snips from his article and then you can tell me if I’m crazy or not. First we have this introduction to the Irish crisis:
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.
He fails to mention that the economic miracle came about when the Irish government lowered corporate taxes to 12.5% giving them an investment environment that attracted investment like crazy. The economy jumped into high gear, unemployment fell to record lows, the Irish coffers were filling-up, and Ireland became the “Celtic Tiger”. Flush with money the govern.ment began spending on social programs like never before. For the first few years the money was coming in faster than they were spending but alas the statist politicians figured out how to spend even faster than the income,i.e., deficit spending. Interest rates were low and people were encouraged to buy homes and the rest is a history that sounds very familiar.
Note the reference in last sentence of the above quote to the fact that the Irish banks borrowed from “banks in other European nations.” This will come-up again later and may be the key to my confusion.
This is what Krugman says next:
Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.
Imagine that: “…turning private losses into public obligations”. Does that ring any bells? Isn’t that what he praised Paulson for doing? And he doesn’t say this just once as we see here:
Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.
So I’m thinking that it is not my mind playing tricks on me.
Krugman goes on to make a comparison between the Irish handling of the crisis and how much better Iceland handed their crisis. Here is what he said about Iceland:
Part of the answer is that Iceland let 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.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.
See that. He does it again: “…Iceland let foreign lenders to its runaway banks pay the price…” So, because it was foreign banks that lent to the crazy Irish banks it’s okay to punish the foreign; but here in the US our banks were able to screw things-up all by themselves. So they should get a free ride.
I’m sorry. It’s not me that is crazy it’s Krugman.