Thursday, December 16, 2010

« Ireland's Choice: Default Now Or Later? »

By Dr. Pitchfork

If it isn’t clear yet, Ireland will default on its bank guarantee. The IMF bailout of French, German and British banks is more than the Irish economy can afford, and far more than the Irish people are willing to allow.

The austerity program put into place over the last two years in Ireland has been painful and people are angry, but the additional austerity that will come with (let’s be honest and call it what it is) the IMF takeover of Ireland’s budget will be crushing. More budget cuts and higher taxes will be pro-cyclical in the short term and disastrous in the long term. It will depress spending now and pile up huge debts and interest payments for later on -- what Hugh Hendry (after Keynes) refers to as “the economic consequences of the bailoot.” It won’t work. It’s not that the IMF and European politicians are short-sighted, it’s simply that they’re stupid. And even worse than stupid, they think they can control the markets. In fact they’re doing nothing but playing a high-stakes con-game, using obsolete economic models, and hoping against hope to reinflate the bubble just one more time. Bon chance, mis amigos.

Again, the only option -- the only viable option I should say (even if the Cowen’s and Lenihan’s of the world are too thick to see it) -- is to default. We’re not talking, of course, about defaulting on Irish government bonds, but defaulting on the ill-advised bank guarantees that went into place in the fall of 2008.

There has been much talk lately about stopping the “contagion” in Ireland, before it spreads to Portugal, Spain, and God knows where else. But here’s the problem: Additional public debts ARE the contagion. And the bailouts are their conduit. Bailing out “Ireland” has only proven that Europe’s TARP fund is full of holes and was never big enough to cover all the bad debts anyway. Meanwhile, countries like Belgium are starting to whinge. The contagion spreads, not in spite of, but because of the bailout. How long will it take for the markets to figure out that Spain is too big to bail? And what happens when they do? Will the Euro continue its slide against less-indebted currencies?

More importantly, which banks will be dragged down with Anglo-Irish, Bank of Ireland and AIB? And who will be foolish enough to try to bail those banks out? As Chuck Prince has shown us, at some point the music will simply stop. This time, everyone except the central bankers seems to know that the bailout waltz is winding to a close, but who or what will be left standing is another question altogether.

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Jimmy Rogers explains how the situation should have been handled...

More detail on this clip is here:

Even better, Rogers never mucks around with airtime. This is a solid 2 minutes of pain for bank-bullshitting fear mongers on both sides of the Pond.

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