Yesterday I argued that Irish austerity doesn't really tell us much about what the US should do. Today it's worth talking about why, exactly, the Irish experience is such a poor model for the problems of the US. Luckily, fledgling think tank e21 has done the hardest part of the job for me: explaining the depth of the problems that Ireland faces.
For the U.S., there was never any question about whether the federal government had the capacity to arrest the panic. At its peak, the liabilities of the U.S. financial system were $17.1 trillion (D.3), or about 118% of GDP. Even if one assumed that assets were worth 20% less than liabilities - a highly aggressive and unlikely assumption - the cost of guaranteeing all of the financial system's liabilities would only be 23% of GDP, or equal to a one-time 50% increase in the debt-to-GDP ratio. Therefore, the implied guarantee of all financial system liabilities after TARP was highly credible.
For other countries with larger (relative) financial sectors, the arithmetic was much different. The most obvious example was Iceland, whose banking system's liabilities reached nearly 1,100% of GDP in 2007. When its banks could not access wholesale funding markets, the government lacked the fiscal capacity to intervene credibly. The result was economic collapse. For other nations, it was less cut and dry whether the government could backstop its banking system's liabilities without incident (see chart above). The United Kingdom and Switzerland's banking system liabilities exceeded 400% of GDP. Both nations took actions to recapitalize banks and provide implicit guarantees of their liabilities - TARP-like programs to stand behind banks and assuage concerns of creditors without legally obligating the government to ensure no bank creditor suffered any loss. Conversely, Ireland, whose banking system's liabilities were also near 400% of GDP, decided to formally guarantee its banking system's liabilities.
While the Swiss and UK guarantees seem to have succeeded thanks to their banking system's international activity and broad diversification, the Irish guarantee has not been as successful, largely because of its banks concentrated exposure to a bursting domestic real estate bubble. The result has been a deeply insolvent banking system that some believe will ultimately push the Irish government itself bankruptcy. Barclays was the latest to warn that the government will likely have to renege on its guarantee and seek concessions from bank creditors if it is to avoid sovereign bankruptcy. As of August, the Irish banking system owed €95 billion to the European Central Bank (ECB), which means about 12% of all Irish bank assets are now financed through official liquidity facilities. This is only slightly below the 17% of Greek assets funded through official channels and a sign that the private sector is no longer willing to fund Irish banks.
The problem for Ireland is that the tax revenue that could otherwise be pledged to cover its banks' debts has plunged for the same reason its banks are in such trouble: the collapse of the real estate bubble. Irish house prices have fallen by 34% from the peak and have yet to stabilize. Irish wealth fell by about €150 billion in 2009, which would be roughly equivalent to an $8 trillion decline for U.S. households. Unemployment has spiked in the very sectors most responsible for growth in the recent past - real estate construction and finance. The same factors driving the banks' insolvency are simultaneously depressing employment, household spending, and tax revenue. The deficit stands at 14% of GDP, due largely to an economic contraction that sliced 10% off of the size of the Irish economy since 2008. The government's gross debt has nearly tripled as a share of GDP, rising from 25.8% in 2006 to 64% at the end of last year and could exceed 75% by the end of the fiscal year.
There are no signs that any of this is temporary or that adjustments made to date are sufficient to maintain access to credit. The initial austerity measures taken by the Irish government - tax increases and large cuts to public employee wages - seemed ambitious, but they turned out to be a drop in the bucket relative to the cost of the bank rescue. The Irish government created the National Asset Management Agency (NAMA) to acquire property development and commercial real estate assets from banks at a sizeable discount to par. As with similar schemes, this government-sponsored fund faces a catch-22: overpay for assets and transfer losses directly to taxpayers or drive a tough bargain and further expose the banks' insolvency. To date, NAMA has recorded €30 billion of losses, or more than 10% of GDP. S&P estimates that ultimate losses will be between 29% and 32% of GDP. To put this figure in perspective, this would be equivalent to U.S. taxpayer losses on Fannie Mae and Freddie Mac of $4.2 trillion, or about 11-times the CBO estimate of $380 billion.
While some think Ireland could be saved through export growth given the number of international corporations that moved to Ireland to take advantage of the low corporate tax rate, the potential for export growth is limited by what the IMF suggests was a bubble in wages similar to the one in property prices. At the end of 2007, Ireland was proudly boasting that it had more Mercedes Benz per capita than Germany. The rise in wages brought about by a booming economy reduced competitiveness. Deflation has set in with prices falling by nearly 2% last year. Export growth will likely first require a period of prolonged deflation, which would result in a dramatic increase in the real cost of the large amounts of newly incurred debt. In short, the Irish economy is still reeling from a financial collapse that is several times worse than that of the U.S. Even the Spanish problems are mild by comparison, as only 4% of Spanish banking system assets are funded by the ECB and Spanish banks are more diversified and better capitalized.
Using Irish austerity as a dire warning to us relies on what I think are oversimplified comparisons. Folks point out that despite austerity, Ireland's tax revenues have collapsed, and their debt is trading at a huge premium to Germany's--much bigger than the premium paid by Spain, which hasn't tried such draconian measures. But Ireland's problems are really rather special. For various reasons, including favorable corporate tax rates and an educated, English-speaking population, capital poured into the country for more than a decade, leading to a banking sector that was grossly inflated compared to the underlying economy. The US banking sector is rather tame by comparison to most European nations--bank leverage at the beginning of the crisis was about equal to GDP, rather than the three to five times GDP found in many European nations. But Ireland is almost in a class by itself.
That meant that when the financial crisis hit, Ireland's contraction was much worse--and much less amenable to government interventions that worked in other countries. It's not surprising that their fiscal crisis is dire, their credit spreads rising.
In order to say that Irish austerity offers a grim lesson for us, you need to know the counterfactual: how bad would growth, tax revenues, credit spreads have been without the austerity? And because of the magnitude of their problems, it is far from clear that austerity has made things worse.
Now, even if austerity had made things better, that wouldn't necessarily be a guide for US policy--again, because their crisis is so much deeper. Attempting to borrow and spend their way out of the crisis might have led to total collapse, but that wouldn't mean that it would have the same effect here, where our fiscal issues are more manageable.
That's why I think it's just not useful to bring it up in the context of the American debate.
The Fox host’s insistence that black laborers building the White House were “well-fed and had decent lodgings” fits in a long history of insisting the “peculiar institution” wasn’t so bad.
In her widely lauded speech at the Democratic National Convention on Monday, Michelle Obama reflected on the remarkable fact of her African American family living in the executive mansion. “I wake up every morning in a house that was built by slaves. And I watch my daughters, two beautiful, intelligent, black young women, playing with their dogs on the White House lawn,” she said.
On Tuesday, Fox News host Bill O’Reilly discussed the moment in his Tip of the Day. In a moment first noticed by the liberal press-tracking group Media Matters, O’Reilly said this:
As we mentioned, Talking Points Memo, Michelle Obama referenced slaves building the White House in referring to the evolution of America in a positive way. It was a positive comment. The history behind her remark is fascinating. George Washington selected the site in 1791, and as president laid the cornerstone in 1792. Washington was then running the country out of Philadelphia.
Slaves did participate in the construction of the White House. Records show about 400 payments made to slave masters between 1795 and 1801. In addition, free blacks, whites, and immigrants also worked on the massive building. There were no illegal immigrants at that time. If you could make it here, you could stay here.
In 1800, President John Adams took up residence in what was then called the Executive Mansion. It was only later on they named it the White House. But Adams was in there with Abigail, and they were still hammering nails, the construction was still going on.
Slaves that worked there were well-fed and had decent lodgings provided by the government, which stopped hiring slave labor in 1802. However, the feds did not forbid subcontractors from using slave labor. So, Michelle Obama is essentially correct in citing slaves as builders of the White House, but there were others working as well. Got it all? There will be a quiz.
The Green Party candidate wants disillusioned Bernie Sanders supporters to join her—not Hillary Clinton.
PHILADELPHIA—Jill Stein takes public transportation to the Democratic National Convention. On the day after Hillary Clinton made history as the first woman to win a major party presidential nomination, the Green Party presidential candidate is on the subway en route to the Wells Fargo Center. Adoring fans spot her on the way over and demand selfies. A heavily tattooed woman complains to Stein: “It’s been a Hillary party the whole time. It’s like brainwash, like waterboarding. It’s awful.”
Stein is in high demand. The populist progressive tells me that after Bernie Sanders endorsed Clinton two weeks ago, effectively ending his insurgent campaign for president, a lot more people started paying attention to her campaign. “The floodgates opened,” Stein says. “I almost feel like a social-worker, being out there talking to the Bernie supporters. They are broken-hearted. They feel really abused, and misled, largely by the Democratic Party.”
Chris Morris’s brutal satire aired its last and most controversial episode in 2001, but its skewering of the news media feels more relevant than ever.
A sex offender is thrown in the stocks, presented with a small child, and asked if he wants to molest him. A mob of protestors is thrown a “dummy full of guts” that is stomped to pieces within seconds. A radio host insists that pedophiles have “more genes in common with crabs” than the rest of humanity, insisting, “There’s no real evidence for [that], but it is scientific fact.”
It’s hard to pinpoint the most cringe-inducing moment on “Paedogeddon,” a special episode of the British TV satire Brass Eye. But 15 years after the episode aired, it remains a totemic, terrifying satirical vision. Few comedies since have dared to cross the boundaries of taste with such impunity.
“Paedogeddon” aired in the U.K. in the summer of 2001, a year after the murder of a young girl had sparked national hysteria over the country’s sex-offender registry. Britain’s most-read newspaper led a campaign to publish the names and locations of all 110,000 convicted sex offenders, prompting a riot in which an angry mob ransacked the home of an ex-con. Brass Eye, a parody of a 60 Minutes-like newsmagazine show, had been dormant after airing one season in the UK in 1997. But it returned four years later for this surprise broadcast, one that saw its furious (fictional) anchors barking from a dark studio about the plague of seemingly super-powered child molesters stalking the nation, holding a funhouse mirror up to the climate of paranoia and fear that had built up around the country. It was a bold, wildly insensitive piece of comedy, but one that captured the growing madness of the 24-hour news media and foreshadowed some uglier aspects of its future.
Psychologists have long debated how flexible someone’s “true” self is.
Almost everyone has something they want to change about their personality. In 2014, a study that traced people’s goals for personality change found that the vast majority of its subjects wanted to be more extraverted, agreeable, emotionally stable, and open to new experiences. A whopping 97 percent said they wished they were more conscientious.
These desires appeared to be rooted in dissatisfaction. People wanted to become more extraverted if they weren’t happy with their sex lives, hobbies, or friendships. They wanted to become more conscientious if they were displeased with their finances or schoolwork. The findings reflect the social psychologist Roy Baumeister’s notion of “crystallization of discontent”: Once people begin to recognize larger patterns of shortcomings in their lives, he contends, they may reshuffle their core values and priorities to justify improving things.
Biology textbooks tell us that lichens are alliances between two organisms—a fungus and an alga. They are wrong.
In 1995, if you had told Toby Spribille that he’d eventually overthrow a scientific idea that’s been the stuff of textbooks for 150 years, he would have laughed at you. Back then, his life seemed constrained to a very different path. He was raised in a Montana trailer park, and home-schooled by what he now describes as a “fundamentalist cult.” At a young age, he fell in love with science, but had no way of feeding that love. He longed to break away from his roots and get a proper education.
At 19, he got a job at a local forestry service. Within a few years, he had earned enough to leave home. His meager savings and non-existent grades meant that no American university would take him, so Spribille looked to Europe.
Seeking prosperity through lax business and tax regulations leaves countries worse off.
In the early 1990s, economists coined the term "the resource curse" to describe a paradox they observed in countries where valuable natural resources were discovered: Rather than thriving, such countries often crumbled, economically and politically. The newfound wealth, instead of raising living standards for all, generated violence, as well as accelerating the growth of inequality and corruption. Terry Karl, a Stanford political science professor, dubbed this the "paradox of plenty." The same story has played out again and again all over the world, from Venezuela (where Karl did her research on the destruction wrought by oil wealth) to Sierra Leone (home of blood diamonds) and Afghanistan (which, despite $3 trillion in mineral wealth, remains among the poorest and most corrupt countries in the world).
At the Democratic convention, the president framed America as a shining city on a hill—under constant construction.
Barack Obama is a tinkerer and a poet in whose hands the concept of “American exceptionalism” is being reshaped for the 21st century and weaponized against Trumpism.
First used with respect to the United States by Alexis de Tocqueville, the concept of American exceptionalism is that this country differs qualitatively from other developed nations because of its national credo, ethnic diversity, and revolution-sprung history. It is often expressed as superiority: The United States is the biggest, most powerful, smartest, richest, and most-deserving country on Earth.
Obama drew from this tradition in his Democratic National Convention address Wednesday night. “America has changed over the years,” he said, remembering his Scotch-Irish ancestors who didn’t like braggarts or bullies or people who took short cuts, and who valued honesty and hard work, kindness and courtesy, humility and responsibility.
His call on a foreign government to hack Hillary Clinton’s email account is a complete subversion of GOP ideals.
The first excuse for Donald Trump’s amazing press conference on Wednesday, in which he called on the Russians to hack and publish the 30,000 emails wiped from Hillary Clinton’s home server, was: He was only joking.
That excuse almost immediately dissolved. When Trump was asked by CNN’s Jim Acosta whether he would call on Vladimir Putin to stay out of U.S. elections, the presidential nominee answered that he would not tell Putin what to do. After the conference ended, Trump tweeted out a slightly tidied up request to the Russians to find Clinton’s emails—but to hand them over to the FBI rather than publish them.
The second excuse, produced on Twitter minutes later by Newt Gingrich, is that Trump’s remark, while possibly unfortunate, mattered less than Clinton’s careless handling of classified material on her server. That defense seems likely to have more staying power than the first—about which, more in a minute.
Food-safety concerns have, unsurprisingly, hurt a company that plays up its high-quality ingredients.
In August of last year, a contributor to Investopedia, an online clearinghouse for financial news and investment advice, made this pronouncement about Chipotle’s miraculously-performing stock: “If you had invested just $1,000 during Chipotle's initial public offering (IPO), that investment would be worth $33,229 today.”
Little did anyone guess that, less than a year later, the fast-casual favorite’s mountain of momentum would be reduced to a hill of beans in the wake of a series of food-contamination episodes last fall and winter. This slide continued as the company announced a 24 percent same-store sales drop in the second quarter of 2016. As the AP noted last week, “a year ago, the company earned $140.2 million”—nearly $4.50 a share—while this year, second-quarter profit was $25.6 million (just 87 cents per share), missing Wall Street’s expectations.