In fact what we have is a quasi capitalist/socialist state which does far too much meddling in the affairs of people. The government takes 50% of your wages because they think that they can spend the money better than you can, they make you pay for €160 for RTE, even though you might not watch it from one Toy Show to the next. They slap taxes on 'bad' things like tobacco and alcohol, because obviously the rest of the adult population can not see for themselves, that these products are bad for ones health. They charge you 80 euro for a passport that cost 14 euro to make. Then they shovel all this money out the door and into the hands of bond holders, who really should have known better.
Why do they do this?
The answer is because we want them to, at some level of our psyche (and it's not just an Irish problem) we want the government to be there to hold our hand. We want someone else to blame when things go wrong. Ah sure it's the governments fault, ah sure the banks are at it again. We refuse to accept that the government and the bankers make up only the tiny fraction of the population. The last time I checked the Celtic Tiger was being enjoyed by many more than just the bankers, builders and the government. Don't get me wrong they were having a hell of a time, but they weren't the only ones. As much as the bankers loved handing out the 110% mortgages, there had to be someone there to borrow, as much as the builders loved building houses, there had to be a insatiable demand in the market for them to bother. As always it takes 2 to tango and as always its easier to find someone else to blame. Don't get me wrong I am not absolving Fianna Fail of the blame, but they are not the only ones to blame either.
What is capitalism?
A capitalist state, in its most extreme (extreme does not necessarily mean bad) form, is one where the government does as little as possible and lets private firms provide for the needs of the country. Most of the businesses we interact with on a daily basis are private, capitalist firms. The shop where you buy your groceries, has to offer you the best value to price ratio, or it will go out of business. The pub you go to with your friends, can maybe charge an extra euro for a pint, compared to the pub next door but only if they are showing live sports, have a band or is just generally a nicer venue. The key thing is that you decide and you pick the option that suits you. Those companies that do not make enough money to survive, go bust and another business that better suits the needs of the public replaces it. This is called creative destruction and is key to a healthy and competitive environment. Competition is the key, without this there is no incentive for a business to offer higher value/price. If there was only one grocery store, they could charge what they liked and treat you however they liked, you would have no choice but to keep going there. In a market economy supply and demand are the only factors that set the price, this goes for everything from land to labour, from bread to beer and from cars to air fares. In a capitalist economy taxes are low, because the government does not do very much, therefore they don't need as much money to spend, therefore you give them less. In fact the only thing the government really needs to do is set out a sound legal framework, protect property rights, provide national defence and regulate planning permission (not an exhaustive list but you get the idea). The rest will be done by the market. Crucially this also means that the government does not regulate too much. If I want to open a bank and run it out of the back of my car, then so be it, if people are happy to deposit their money with me at the rate of interest I am quoting, then good for them. If my bank collapses after a week and I've lost 100k worth of deposits, by giving said deposits out on loan to the wrong guy, then c'est la vie. The world moves on, people learn and the next time they will be more careful . In a capitalist world there is no minimum wage, people would be paid based on the amount they produced. If they produced a lot they would be paid a lot, this spurs creativity and motivates people. There would be no social welfare either so the option of sitting around being a benefit bum isn't an option. This would not mean that an umeployed person could not get a job, what it would mean is that you could supply your work at a lower wage in tough times making your labour more attractive to employers. Better yet you could set up your own company and employ others at a rate that both you and they felt was fair.
The opposite to capitalism is socialism, this is where the state controls everything. There is one grocery store, one book store, one pub, one nursery and tough luck if you don't like it. These businesses never go bust because they make a genuine profit (which is easy to do with no competition), or they get subsidised by the state (your taxes). While this may seem like an idilic situation - where everyone is equal and all share equally in the rise and fall of the economy. The fact is that it does not work, just ask the Russians. There is no motivation to work harder than the laziest worker. You will be paid the same, shop in the same supermarket, drink the same beer. Why should you break you ass if he/she does not?
Somewhere in the middle although slightly to the right (capitalist side) of these 2 extremes lies most of the Western World. As I mentioned, most of the day to day dealings are with private businesses. Banks (wait scratch that), supermarkets, book shops, phone shops etc. However some key enterprises are still controlled by the government. Needless to say efficiency and quality are not at the top of the list in these places. The sight of people on hospital trollies is hardly a hall mark of quality. You wouldn't see that in the Blackrock Clinic because, if it were the case they'd go bust. Do you remember the last time that you had to queue for a driving licence, ye gods it's horrific! I waited 8 months for my driving test in the government run days, its now private and the waiting time is weeks.
Lets look again at the scenario, had real capitalism been allowed during the financial crisis. Anglo would have gone bust and would have dragged AIB, EBS, Permanent TSB and the rest down with it. Bank Of Ireland may have survived, but it would have been very touch and go. Any deposits (which are loans made by you and I to the bank) over 20,000 would have been wiped out and the 'assets' or the loans, that the banks made to people (mortgages, credit cards etc) would have been flogged to the highest bidder in a fire sale, as the bank was liquidated. People would potentially have been able to buy their own mortgages back at a fraction of the par value (its impossible to say how much, but 30% of the total is not an unreasonable estimate)**. There may even have been no market for the loans. In this case people could buy them back, practically for free. The banks bond holders would have been wiped out in one quick swipe, left to pick the remains of what, if anything was left. Shareholders and junior bondholders would have been wiped out. Many businesses would have been wiped out, creative destruction would be well and truly come to the fore. Those that survived would be the leanest and meanest around, and fair play to them. Who would stand to lose the most in absolute terms from this? Those with the most to lose, those who had put the most money into these creaking institutions without verifying the risk.
It's very hard to say whether or not the Irish government would have had to default under the scenario, the Irish banks were and still are big holders of its debt. This national debt too would be sold in a fire sale, and as most of the European Banking system would have similarly collapsed (triggered by Ireland) there may have been no buyers for the governments bonds. I don't have the facts and figures to be able to draw a conclusion on this, but I think its fair to assume total bankruptcy of the Irish state and by extension most of the Eurozone, and the UK and maybe the US. Ooops.
All of this would have created chaos, the country would have reverted to the punt and would have been unable to pay for petrol or gas (although the price of this would plummet), we would have no new drugs to fight illness and disease.
What would we have?
Well we'd still have a sovereign state with the ability to feed itself 20 times over, an abundance of natural resources, fossil fuels (not the cleanest in the world but who cares) and a highly educated population. Assuming the rest of Europe was in a similar position i.e. bust, the benefits of emigration would be lessened. Some might even see it as a golden opportunity to start afresh. Can you imagine the competitive advantage we would have. Little or no debt vis a vis other nations, our wages would fall dramatically as the demand for workers fell, while the supply rocketed (high unemployment). We could manufacture products at a fraction of the pre crash cost, sell our dairy and livestock cheaper than anyone. After a period of time the country would get back on its feet. Whether it would take 6 years to do so or not is the over arching question. We would never get back to the days of the Celtic Tiger, but in relative terms, with no debt we could be just as well off although with less iphones and other such frivolous luxuries.
Would this pain have been necessary?
Probably not, the most important factor here is to let people think for themselves. This leads back to the question of the Grown Up vs Nanny State. In the lead up to the crash people were lulled into a false sense of security. They felt that regulators would watch over everything removing risk from the system. This lead them to deposit money at the bank, with the highest rate of interest instead of depositing it at the bank that was fundamentally the soundest. People did not look at the price/value or in this case the risk/reward ratio. But these people were lead into this trap by the professionals. The so called capital markets. This is where the rot started and this is where the pain should have been felt. For these professional investors were also lulled into a false sense of security. They didn't discriminate between Anglo and Bank Of Ireland. They felt that one was as safe as the other which quite clearly was not the case.
Why did they think this?
They thought this because the regulators were meant to be keeping an eye on the risks, they thought this because they felt that they were smarter than the rest, and that they could get high return, without the high risk associated, they thought they could have their cake and eat it too. How was the little old lady with her pension pot to know, that putting all her money in Anglo shares was a bad thing? If the pros were doing it and raking it in why shouldn't she? Herein lies the fundamental problem. The pros may have done this even in a world without a regulator. It's highly unlikely though, if a firm genuinely thought that there was a chance that it's money would not be redeemed. It would have taken a much closer look at Anglo. It would have seen that they had bet the farm on the Irish property market. A sensible investor may have invested in Anglo bonds anyway, but they would have charged much more interest to compensate for the risk. Then they would have done the same for AIB and charged BOI less as it was less risky.
So in the real grown up world, AIB and Anglo would have been at a competitive disadvantage to BOI. They would have to pay more and thus charge more for the loans that they made. Would a property developer borrow billions from Anglo if they had to pay 8% interest instead of 4%? I think not.
In the nanny world though there was no risk, everything was the same. Anglo paid 4% as did AIB. BOI possibly paid more because it wasn't making enough money (taking enough risk).
In my next post I will look at what should have been done and what the outcome may have been.
*I say this very cautiously
**Most people however would not have had the wherewithal to buy back their loans though. So what would probably have happened is that a foreign buyer would have bought the loans even cheaper again and asked the owner to pay back the mortgage over a long period.
**Most people however would not have had the wherewithal to buy back their loans though. So what would probably have happened is that a foreign buyer would have bought the loans even cheaper again and asked the owner to pay back the mortgage over a long period.
