20.4.09

"DON'T FOLLOW IRELAND"

The worst thing that could happen to the USA would to become like Ireland, writes the economist Paul Krugman

The US can borrow, for now, but it could end up like the Irish government, forcing its taxpayers to bail out the banks while loading the same taxpayers with higher taxes and lower benefits.

In the boom years both the US and Ireland turned a blind eye to banking and investment regulations (or scrapped them altogether), allowing an unfettered boom and bubble, most obviously in property.

In the bust, both governments have handed taxpayers the tab for losses that are almost so big the banks can’t or won’t say what they’ve lost.

But unlike the US, the Irish government cannot borrow. Investors are worried about the Irish state’s solvency.

Unable to borrow money, except at penal interest rates, the Irish government has turned on its taxpayers, boosting taxes, cutting benefits, while all the time booking the cost of the crisis to the taxpayer.

Why is the US different to Ireland? It's not about size. The US dollar is the world's premier reserve currency, and whatever assets international governments and corporations have, they put a lot of them into US dollars, effectively lending to the USA.

Why is the US similar to Ireland? It didn't save for a rainy day, it lived (and even fought wars with borrowed money) and now those who lend to the US (the Chinese, the Japanese) are asking what's being done with their money.

Krugman's point: The US may follow Ireland if it continues to shovel bailout funds into the banks, allowing the banks to make private profits with public money, all because the government - staffed by former financiers - has decided the financial sector is the only sector that's too big to fail.

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