Those who have been reading me awhile know that I’m a closet economics geek. The Chinese aphorism is may you live in interesting times and if they didn’t get so damned scary, it would be utterly fascinating. But the periodic conversation over the past several months has been the game of economic dominoes played first in Greece and most recently in Ireland. Just what is going on in Ireland? What does it mean to my family?
One of the better layman’s explanations of the Irish predicament comes from Gonzalo Lira. I recommend the article in it’s relatively brief entirety as it lays out the core of the problems that now face the Irish.
But what does it mean for my family? The gist is that the Irish backed their failing major banks in their entirety without knowing that the banks had blown such gaping holes in their hulls that they saddled the Irish taxpayer with a ghastly debt burden. What it means for my family is the concept of austerity, in which the national economy goes into literal lifesupport as desperately needed capital is transferred from the taxpayer to support the banks. As the Irish did with their Anglo-Irish Bank, we’ve thrown life support to the TBTF entities so that the typical American family will carry huge tax burdens to cover the cost of that debt. The result will be higher taxation of the general public and greatly constrained public spending as the debt assumed from the financial system crowds out the debt that would be used for real public expenditures, and that was already too high to begin with.
What is frightening is that it truly is a game of economic dominoes. If the poorer European Union nations – the infamous PIIGS – are permitted to flounder and collapse the Euro, then the stronger core European banks holding the PIIGS sovereign debt will fold. If these banks fold or collapse in any way, the interconnectedness with the US TBTF institutions will create stunning pressure on the US financial system with the growing prospect of collapse.
I’m actually sorry that the Irish government caved in and took the IMF/European Central Bank rescue proposal since it ostensibly saves the bank bondholders at the expense of the Irish taxpayers for the next generation (that isn’t an exaggeration, either). It’s once again the bondholder and corporations – one group relatively few in number and the other legally fictitious – that will prosper at the expense of the mass of the taxpayers. That’s a continuing thread that poses a true threat to my children’s future.