Capitalist Wimps: Ireland Buckles Under

One of the stark lessons we have learned from the financial crisis here and abroad is that old fashioned capitalists are hard to find. Perhaps they always were. At least in banking.

I am amazed at the severity of the new budget squeeze Ireland is being put through by its government. Here we have a perfect example of a democratically elected government, whose duty, presumably, is to the people of Ireland, imposing crushing cuts and increased taxes on those very people.

Why?

To avoid upsetting bankers. Most of whom don’t live in Ireland.

Here is a classic confrontation between democracy and capitalism, and the capitalists are winning.

The voters of Ireland will have a say, perhaps as early as January, but by then it will be too late. The stunning and enormous stupidity of the Irish bankers will have dealt a death blow to the economic aspirations of an entire generation of Irish citizens. The bankers, or course, are doing just fine. This encapsulates nicely the asymmetry in the global economy. In the minds of the serious people who make up our economic policies it is more important to protect the health of the banks than the health of the citizenry. Never mind that the citizenry was innocent. Never mind that the budget was tightly run prior to the epic incompetence of the bankers overwhelmed it. Never mind that the people are excluded from deciding their own fate.

No. The wishes of the market must be served. That the same market players created the mess is of no matter. We must listen to their wisdom as to how to clean up their mess. They are experts after all. Experts, apparently, in mess.

The most notable factor here is that the creditors now demanding the destruction of the Irish economy at the altar of market protection, are steeped in capitalist ways. They demand to be allowed to pay themselves massive bonuses because, we are told, they are on the front lines of capitalism. They move trillions of dollars about the globe every day. They are so brilliant that they can tell within a whisker where the best returns are and which risks to avoid. They deserve to be compensated like kings for this genius skill set.

It is this risk aversion skill that they are now pounding into the heads of the serious people running Ireland. If you don’t protect our investments, they say, we will crush you like a bug. Your interest rates will sky rocket and you will be beholden to us for ever.

So amazing were these risk identification skills that there are enormous numbers of creditors with Irish debt in their portfolios. Debt they bought willingly. Debt that has a risk attached to it. Debt that they tested and found acceptable. Debt that compensated them for their risk. Debt they could have sold. Debt they amassed in the good old days before the real estate bubble … oh wait.

Socialism is a very good thing, suddenly, for these denizens of capitalism. They want to be made whole on their investments. They find it repugnant that Ireland might default because of the bubble disaster created by the instability of capitalist finance. In other words they want to avoid one perfectly normal consequence of being a capitalist lender: the borrower may default. Default is not unusual. That’s why bonds earn a return: to compensate for the possibility that the borrower may default. All those interest payments and the trading profits on the bonds stem from the existence of that possibility. Yet now, when that risk is no longer a probability in some arcane risk model, but is actual, they suddenly decide they want full repayment.

They took a risk. That’s what capitalism is about. Take a risk. Take the consequences. It’s the heroic story Ayn Rand proselytizes in her utopian visions. Her heroes man up and bestride the world because of their rugged ability to take the consequences of their own actions.

But our bankers aren’t fans of Rand.

They are big fans of Marx or maybe Rosa Luxemburg.

They want all the reward and none of the risk.

So when Ireland looks like it should default – and I think it ought – then they scream bloody murder and demand to be paid in full. If being paid in full implies destroying Ireland, then so be it. Who cares about Ireland anyway? As long as the big banks survive to pay those big bonuses they earn for being so good at judging risk.

And who cares about Portugal? Or Spain? Or any other democratic place? As long as the big banks and the financial system survives intact.

Now I can’t abide socialism, but nor can I stand faux capitalism. If the banks take risks they should pay the consequence. More to the point their shareholders need to be wiped out. That’s the way the game is set up. In a democracy the people should be allowed to decide whether they want to suffer the kind of repressive austerity being foisted on the poor Irish in order to save the banks, or whether they are willing to forgo international borrowing for a while because they prefer to default.

That choice was never given to the Irish people. It was assumed, by the serious people running the place, that saving the banks took precedence over the Irish way of life.

So here we have an instance of capitalists forcing a draconian diminution in a living standards on a democratic country in order to avoid the true consequences of capitalism. And the people of the democracy will only participate in deciding their fate after the fact. Some democracy!

And the pity of it all is this: the bail out deal cut by the Irish government won’t seal the deal. The markets are now scared of the political turmoil the punishment is sparking. Ireland’s creditors are now running scared of another mess they created. It never ends with these faux capitalists. Besides, given the size of the debt problem they have, I think the Irish need to default immediately. Impose a good old fashioned capitalist hair cut on their creditors, then suck it up for a few years while those creditors sulk and don’t lend to you. This is surely a better route than suffering years of enforced impoverishment just so the creditors don’t throw a tantrum.

Ireland is bankrupt anyway. Why pretend otherwise? Just to save the banks?

It isn’t worth it.

Addendum:

People get far too hung up over the stigma of default. I have a different view. It is inherent in any loan contract, formal or informal, that the borrower has the right to default. This is especially true in a secured loan like a mortgage. Why else is there a lien on a house if the right to default is absent? The existence of the lien is recognition by the lender that the borrower can walk away from the loan. The borrower recognizes that this implies giving up title to the house. If the loan becomes a burden for some reason, and in the absence of fraudulent intent, then the borrower has every right to exercise their rights under the contract and walk away. In non-secured loans this right is more murky but it surely exists: why else is the lender earning a return? The existence of an interest rate implies the recognition of a possibility of default. The whole idea of banking is to measure that possibility, get compensated for it, and to balance the likelihood of defaults across a spectrum of assets.

In any case the puritanical belief that people of nations should suffer deprivation rather than default is just nonsense. It implies that bankers have no responsibility to assess risk. Those absurd interest rates bankers charge on their loans suggests that they think they need to be compensated for risk. So force them to accept it. Don’t buckle whenever they get all teary eyed and cry foul. They’re capitalists, they should have no emotions anyway.