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 Russian leader tries to claim the role of senior partner in relationship with the U.S.
You have to feel bad for the Moldovan president. The newly elected Igor Dodon had traveled to Moscow to meet Russian president Vladimir Putin for the first Russian-Moldovan bilateral meeting in nine years. Yet here he was, standing side by side with Putin, his hero and model for emulation, at a regal-looking press conference and some reporter has to go and ask about the prostitutes.
“You haven’t yet commented on the report that, allegedly, we or in Russia have been collecting kompromat on Donald Trump, including during his visit to Moscow, as if he were having fun with prostitutes in a Moscow hotel,” said the reporter with the pro-Kremlin LifeNews. “Is that true? Have you seen these files, these videos, these tapes?”
A mix of patriotic balladeers and apolitical acts will take the stage on Thursday and Friday.
It is not true, as a lot of commentary would have it, that Donald Trump’s inauguration will feature “no stars.” Some of the entertainers who have signed on to play have, in fact, built their success on entertaining millions of people. But it is true that what’s considered “the A-list” will be conspicuously absent, as will be acts from other lists: The B-Street Band, a Bruce Springsteen tribute group, backed out from an unofficial inaugural party after outcry; Broadway singer Jennifer Holliday reneged from the main concert event.
The mix of entertainers lined up for Thursday’s “Make America Great Again! Welcome Celebration” on the National Mall and Friday’s swearing-in ceremony represents a hodgepodge of ideology and expediency. In a savvy MTV essay about Trump’s national-anthem singer Jackie Evancho, Doreen St. Félix argued that booking the 16-year-old America’s Got Talent runner up was “a matter of scavenging, and then gilding over the spoils”—a description that could apply across the lineup given the many headlines about Trump’s team getting turned down by celebrities then saying that not having famous people is a good thing. But in its relative lack of glitz, and in its coalition of performers well familiar to state-fair stages, this week’s bill may inadvertently achieve the stated inaugural goal of projecting an image not of Trump but of the people who elected him.
The president-elect’s lawyers have explained why they don’t think he’ll violate the Constitution’s foreign emoluments clause—but their arguments fall apart under closer scrutiny.
Last week, President-elect Donald Trump’s lawyers issued a brief, largely unnoticed memo defending Trump’s plan to “separate” himself from his businesses. We believe that memo arbitrarily limits itself to a small portion of the conflicts it purports to address, and even there, presents claims that depart from precedent and common sense. Trump can convince a lot of people of a lot of things—but neither he nor his lawyers can explain away the ethics train wreck that will soon crash into the Oval Office.
It’sbeenwidelyacknowledgedthat, when Trump swears the Oath of Office, he will stand in violation of the Constitution’s foreign-emoluments clause. The emoluments clause forbids any “Person holding any Office of Profit or Trust under [the United States]” from accepting any “any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State” (unless Congress explicitly consents).
Some Democrats, most notably Representative John Lewis, have labeled Donald Trump with the same epithet applied to his two immediate predecessors.
When was the last time America had a “legitimate” president?
You’d have to go back a ways to find a unanimous choice. Certainly not Donald Trump. Representative John Lewis, the civil-rights icon, has sparked a fury by saying, “I don't see this president-elect as a legitimate president.” Had Hillary Clinton won, she would not have fit the bill, either: Trump said repeatedly during the campaign that she should not have been allowed to run. Certainly not Barack Obama. Many opponents—none of them more prominent than Trump, yet again—argued, falsely and preposterously, that he was not even eligible to stand for the presidency because he had not been born in the United States. And certainly not George W. Bush, whom many Democrats viewed as illegitimate for several reasons: his popular-vote loss; questions over the final count in Florida; the fact that the Supreme Court effectively decided the election on a party-line vote.
Why Nixon's former lawyer John Dean worries Trump could be one of the most corrupt presidents ever—and get away with it
Sometime early last fall, John Dean says he began having nightmares about a Trump presidency. He would wake in the middle of the night, agitated and alarmed, struggling to calm his nerves. “I’m not somebody who remembers the details of dreams,” he told me in a recent phone call from his home in Los Angeles. “I just know that they were so bad that I’d force myself awake and out of bed just to get away from them.”
Few people are more intimately acquainted than Dean with the consequences of an American presidency gone awry. As White House counsel under President Richard Nixon from 1970 to 1973, he was a key figure in the Watergate saga—participating in, and then helping to expose, the most iconic political scandal in modern U.S. history. In the decades since then, Dean has parlayed that resume line into something of a franchise, penning several books and countless columns on the theme of presidential abuses of power.
A history of the first African American White House—and of what came next
In the waning days of President Barack Obama’s administration, he and his wife, Michelle, hosted a farewell party, the full import of which no one could then grasp. It was late October, Friday the 21st, and the president had spent many of the previous weeks, as he would spend the two subsequent weeks, campaigning for the Democratic presidential nominee, Hillary Clinton. Things were looking up. Polls in the crucial states of Virginia and Pennsylvania showed Clinton with solid advantages. The formidable GOP strongholds of Georgia and Texas were said to be under threat. The moment seemed to buoy Obama. He had been light on his feet in these last few weeks, cracking jokes at the expense of Republican opponents and laughing off hecklers. At a rally in Orlando on October 28, he greeted a student who would be introducing him by dancing toward her and then noting that the song playing over the loudspeakers—the Gap Band’s “Outstanding”—was older than she was.
Why some people are withdrawing from mainstream society into “intentional communities”—and what the rest of the country can learn from them
For the last eight years, Nicolas and Rachel Sarah have been slowly weaning themselves off fossil fuels. They don’t own a refrigerator or a car; their year-old baby and four-year-old toddler play by candlelight rather than electricity at night. They identify as Christian anarchists, and have given an official name to their search for an alternative to consumption-heavy American life: the Downstream Project, with the motto to “do unto those downstream as you would have those upstream do unto you.”
As it turns out, exiting the system is a challenging, time-consuming, and surprisingly technical process. Here in the Shenandoahs and central Virginia, a handful of tiny communities are experimenting with what it means to reject the norms of contemporary life and exist in a radically different way. They seem to share Americans’ pervasive sense of political alienation, which arguably reached an apotheosis with the election of Donald Trump: a sense of division from their peers, a distrust of government. The challenges of modern politics—dealing with issues like climate change, poverty, mass migration, and war on a global scale—are so vast and abstract that it’s difficult not to find them overwhelming. But instead of continuing in passive despair, as many Americans seem to do, the people in these communities decided to overhaul their lives.
Surfing the app on a trip back home can be a way of regressing, or imagining what life would be like if you never left.
My parents moved out of my hometown almost as soon as I left for college, and therefore I am obsessed with the idea of other people’s hometowns. Over any major holiday or break from a work schedule, hometowns become a sort of time travel, a way for people who have made adult lives elsewhere to return to their origin story.
Going home for the holidays can act as a kind of regression. Most of us know people, whether our friends, our partner, even our own parents, who suddenly turn into their teen or pre-teen self once they step foot in the house where they grew up. My mom used to say that whenever my dad got within 50 miles of his mom’s house, he suddenly became a teenage boy. Our hometowns become a kind of permission and hideaway, a place where we don’t have to be ourselves, where our actions don’t count and we get to be briefly less visible than we are in the adult homes we’ve made for ourselves elsewhere, the places where we expect ourselves to take action and achieve things and move upward through each day. For many of us, hometowns allow the luxury of a brief period of stasis, a rare few days of doing nothing.
Tulsi Gabbard, a Hawaii congresswoman, has a worldview that aligns closely with President-elect Trump’s.
Representative Tulsi Gabbard is traveling to Syria and Lebanon for what her office called a fact-finding trip—her latest controversial move that will likely frustrate her fellow Democrats.
A statement from her office declined to comment on who Gabbard will specifically meet in Syria, citing security concerns, but noted she would meet with “a number of individuals and groups including religious leaders, humanitarian workers, refugees and government and community leaders.” It’s unclear if those government officials include Syrian President Bashar al-Assad, who will likely welcome the prospect of meeting an elected American lawmaker as he tightens his grip on power. News of her trip was first reported by Foreign Policy.
Those who worry that it undermines state secrets would do better to start addressing the core reasons that the classification system is losing legitimacy.
On Tuesday, President Obama commuted the prison sentence of Chelsea Manning, a former Army analyst who violated several laws that forbid disclosing facts that have been declared classified by the U.S. government. Laws against revealing state secrets are intended to protect national security and the safety of the men and women who serve in the military and intelligence services. Those are worthy aims and the laws are defensible in principle.
In practice, the legitimacy of state-secrets laws has been undermined by their frequent abuse.