Irish Fiscal Madness for Dummies

I’d like to introduce the latest member of the Bock Collective.

Brian Lucey is Professor of Finance at the School of Business, Trinity College Dublin, which means he knows a lot more than I do about the state of our economy.  I asked him to contribute an article for BTR and, after he stopped laughing, he said, Why not?

So here we go.  This is a piece on the insane Anglo bailout and a brief explanation of how the central bank is burning your money.



This recession has been a mixed blessing.  There has been some sense of recovery of a realisation of what’s importan , the gaudy lustre of the boom having faded.  Family, friends, light, heat, carbohydrates, that sort of thing. At another level it is a blight on the landscape, what with emigration returning like a nasty social disease we though we were too posh to suffer from, the persistent sucking sound that is the national wealth being siphoned off to the banks, the realisation that we overspent massivly in the boom and, banks aside, would STILL be broke. And then there is the explosion in social meeja.. We have seen the veritable good, bad and ugly of twitterati, bloggerati etc emerge, each vying for our spare time.

Among the more evolved blogs to emerge is this very site. For years now Bock, bless his black blood pumping organ, has been publicly, vocally, eloquently and occasionally accurately, analysing the mess we find ourselves in.  Schloss Bockstein must be a veritable hive of activity daily as minions scurry, henchmen worry and sycophants curry favour with The Bock, all to create what is a unique if somewhat dyspeptic view on the world. Has it been only 6 years since he sashayed onto the virtual stage? It seems much much longer….

One of the things that our genial host has been concerned about is the Anglo Irish Promissory Notes.  These are quare things that the 2008 geni loci, the cabinet of curiosities that was then our government, issued to Anglo, late of solvency. The point in doing so was to allow Anglo to ruck up to the discount window (second floor location ) of the central bank and swap them for money. This was because Anglo had run out of everything else to swap: normally and quite reasonably banks swap illiquid assets for liquid assets, pledging say a billion in commercial loans repayable in 4 years for 0.997b in cold hard cash to be repaid in a weeks time. If this sounds like pawning your coat, be assured that it is almost totally not.  The ECB does not have three balls.  Anglo had, in 2009, run out of everything to swap. Even the fairly liberal acceptance policies of the ECB had baulked when they turned up with crayoned letters issued as documentation for a loan on a soggy field in north Leitrim inhabited by rabid geese. So, they were in danger of going bust, and that we are told is A Bad Thing. So, to keep the show on the road and repay the bondholders the then government gave these PromNotes to Anglo, who swapped them for money at the Central Bank of Ireland.

Now, central banks create money out of thin air. That’s what they do and that is what my colleague Patrick Honohan did.  The problem is, what if everybody did that? It’s one thing a chap in Dame Street creating €30 billion and therefore allowing the repayment of bondholders. What if someone in Madrid did it? Or a fella in Rome? Sure we could find ourselves in Europe with a couple of trillion (remember when we used to care about millions) in extra euro floating about. This would make the Bundesbank, the core of the ECB, angry, as Germans have had … unfortunate… experiences with inflation what with the collapse of the Weimar republic, the rise of Hitler, genocide, the obliteration of Dresden, invading Russia and all that.  And inflation is a function of too much money chasing too few goods. So, no, to stop this dreadful spectre, the ECB demands that the Irish central bank gradually destroy the money it has created. The accounting treatment of this is enough to make an angel weep, but in essence this is the central bank each year getting 3.1b from Anglo (who haven’t got it so it comes from the State, you dear reader, having been borrowed from the Troika) and then offsetting that against the same amount of real money they earlier created.  Its borrowing money to destroy it. Which makes as much sense as wearing a dead badger round your neck to keep from getting toothache. In the context of a maximum of a couple of trillion (2) in a Europe that has about ten (10) trillion of money already sloshing around it may make even less.  And when you consider that the ECB has already in effect injected the thick end of two trillion into banks through a device called LTRO , allowing them to rebuild their shattered balance sheets, it may make even less sense. Europe, never mind Germany, is not on the verge of hyperinflation, so one sees here how culture beats strategy every single time.

So, we find ourselves caught. We have no friends in the Eurozone, only creditors. Our best friend in this crisis (because we are so intertwined economically that our mess is theirs) has been what my granny called Pagan England, who have created money hand over grubby fist to keep the show on the road. Meanwhile, in Frankfurt the ECB look with fearful eyes at the experience of the Weimar republic in the 1920’s (too much much too much waaaayyyy too much money) rather than the USA in the 1930s (too little, system seizing up due to too little money).

Lets do the time warp again ….




Previously on Bock

11 thoughts on “Irish Fiscal Madness for Dummies

  1. Keep this man in the collective.Buy him drink if you have to. Just make sure he stays.Brilliant.

  2. Liaquat Ahamed’s ‘Lords of Finance’ published in 2009 was an excellent exposition of the mistakes of central bankers following the 1929 Crash. The Germans seem not to have read it.

  3. Sheskin — Buy him a drink? Certainly not. I’ll just have him savagely beaten by henchmen if he tries to leave. Resistance is futile.

    Ian — That’s something I have in common with the Germans. Must get it.

  4. why can’t the €3billion be paid off and another loan raised for the same value at long term rates? use this new loan to pay a further €3billion of the €27bn owed. continue this process, and by about teatime, the money owed from the prom notes, has been repaid, and the government owes the central bank €30bn at 0.025% over 200 years.

  5. Just caught up with an Australian slant on the Irish fun via an aussie ABC programme called 4-Corners ( from last Monday)
    Have a look for it on iView.
    One little snippet I learnt was that there’ll be a 3 billion repayment (to the bondholders ?) every year for the next 17 years.

    Might watch it again…

  6. snookertony » Not quite correct. Bondholders have already been paid. The €3.1 billion is to the Irish Central Bank very year for the next 10.

  7. Ah, that’s good then. That’ll be like changing the money from one pocket to another – still in your possession but resting elsewhere.

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