More trouble overseas:
In a sweeping action meant to regain the confidence of jittery investors, the Irish government said Thursday that it expected to inject billions more euros into two of its largest banks, underscoring the extent to which they continued to jeopardize the country’s fiscal condition.
Brian Lenihan, the Irish finance minister, said that Allied Irish Bank — once the biggest in the country — would come under government control as a result of a state-guaranteed share offering worth €5 billion, or about $6.8 billion. The bank had been trying to raise capital by selling assets, but Mr. Lenihan said the current market conditions would not allow for a private transaction.
The government also confirmed market expectations that under a worst case scenario, its financial commitment to a smaller bank that it already owns, Anglo Irish, could reach €35 billion. This figure equals an earlier forecast by Standard & Poor’s, one that at the time was questioned by government officials. Some Irish analysts said that the ultimate bill for Anglo could be even higher than that.
I can’t be the only one who remembers wingers talking about the “Celtic Tiger” and how we needed to model our economy and tax policies (translation- deep cuts in the corporate tax rate) after them in order to remain competitive with Ireland. Hell, I remember a 60 Minutes special.
Good times.
Punchy
I finally found THE song that escapsulates a vast majority of peeps here in flyover land…
ppcli
Chuckle chuckle. One of my action movie gang buddies is a colleague at our law school/econ department who does tax policy. Big on cutting corporate taxes. (I’m actually fairly sympathetic to the line, but he can go on and on about it…) I don’t think I had a single conversation with him in which Ireland didn’t make at least one appearance. Until about two years ago, when suddenly Ireland ceased to exist. I worried that perhaps it had sunk into the sea.
geg6
Yeah, all those glowing reports about how all the best people in Europe were leaving the Islamocommie countries to get all those fabulous jobs from American companies who were outsourcing production and even headquarters to the Emerald Isle.
Funny, I never hear about that anymore.
fasteddie9318
Wait, there are still corporations paying taxes? Well, this only reinforces my point that we need further cuts to the corporate tax rate. Because Reagan, and not soshulism also too.
Calvin Jones and the 13th Apostle
How long until the requiste McAdled post saying this will all blow over, Ireland will get paid back in 9 months, and the booming Irish economy will resume soon?
Brachiator
Hold onto your sheleighly! A central government policy bailing out a bank? In today’s tea party anti-big government alternate universe? Unpossible.
And then there’s this:
Maybe they need more deregulation.
Anything from the gang at Reason or the Heritage Foundation looking back at Ireland’s and Iceland’s flirtation with deregulation and rigorously “pro-business” financial practices?
burnspbesq
G’head, y’all focus on the last two years, which are by any meaningful standard outliers, and ignore the spectacular improvement in the standard of living of the average Irish citizen since the 1980s.
The Irish paradigm worked. And it will start to work again when the current unpleasantness is behind us.
Sigh.
Dave
It wasn’t the corporate rates that did it. It was the low interest rates, interbank lending and the property bubble. Too few banks carried too much of the property debt, and when the economy started to slow down…chaos.
It’s amazing how much of the global financial crisis can be marked down as “really fucked up banking practices.”
burnspbesq
Ireland had a real estate bubble so outrageous that in 2006-07, Irish people with money to invest were bargain-hunting in New York. What’s happening now is the inevitable result of the bursting of that bubble.
The Irish economic model is still fundamentally sound. It’s still an EU member state with an educated, English-speaking labor force, good infrastructure, etc. It’s the best place for non-EU multinationals to centralize their European operations.
I would have been just as happy to see the Irish government let Allied Irish fail – it’s not like there would be a vacuum that wouldn’t be filled by British and American banks – but out of fear of the credit markets’ reaction, the government chose to bail them out/take them over. Oh well.
Ask any Irish person over age 40 whether they’d like to go back to the way things were in Ireland in the 1970s. Then stand back.
ppcli
@Calvin Jones and the 13th Apostle: To judge from the time markers on comments, it took exactly six minutes. You know this board!
Comrade Javamanphil
@burnspbesq: Shorter burnspbesq: The policies that wrecked the international economy are sound and will be proven so again once somebody else cleans up this mess we made.
Dennis SGMM
I blame it all on John DeLorean.
burnspbesq
@Comrade Javamanphil:
That’s such a ridiculous misstatement of my views that I’m not bothering to respond. If you want to have a serious conversation, just say so, and I’ll play. But don’t waste my time with shit like this.
liberal
@burnspbesq:
It fails as a paradigm because it relies on having relatively low corporate tax rates, so cannot work for all nations simultaneously.
burnspbesq
@Dennis SGMM:
That would be a mistake. DeLorean’s factory was in Ulster, which unfortunately is still part of the UK.
Dave
@Comrade Javamanphil:
I think you are being unfair to burnspbesq here. He is right that, overall, Ireland does have a sustainable economic model. The problem was too few banks holding too much property debt when the bubble burst. Which isn’t an Irish problem but one that smaller European countries seem to have. They have their major banks and they tend to control the whole of that country’s banking industry. Iceland had the same problem. This isn’t like Greece, where no one knew how much the government was spending and people were cooking books.
And he is right about something else. The Irish will take this over how things were in the 1970s any day of the week and twice on Sunday.
liberal
@burnspbesq:
True, but I thought super-low corporate tax rates were a big part of the attraction.
MattF
Felix Salmon covered some of this a couple of days ago– FYI, the Euro crisis is not over.
burnspbesq
@liberal:
Taxes are a big part of the story, but not the whole story.
Tax incentives can and do influence location decisions; no sensible person would ever suggest otherwise. But even if every country on earth dropped its corporate income tax rate to 12.5 percent tomorrow, many of the things that are now in Ireland (and Singapore) would likely stay there, both because of switching costs and because there are non-tax-rate-dependent advantages to operating in those places.
Cyprus has a 10 percent tax rate, but you don’t see US multinationals falling all over themselves to relocate their European operations from Dublin to Nicosia. And no one has ever suggested building a fab on Grand Cayman.
Dennis SGMM
@burnspbesq:
I should have known better than to try to sneak that past this crowd.
liberal
@burnspbesq:
Better yet, I’m sure the libertarian paradise of Somalia has a very, very low legal corporate tax rate. Probably 0.00%.
I thought the greater issue here isn’t regarding Ireland’s paradigm for Ireland, but rather the applicability of that paradigm to e.g. the US. At least, that’s the point of JC’s post.
Linda Featheringill
@burnspbesq:
Yes, the Irish system worked. Until the whole global economy changed.
The Great Recession isn’t limited to the US and it certainly isn’t all under the control of the Administration.
I think that the point being made here is that the current retraction is so big that tax breaks to corporations, etc. won’t turn things around.
Dave
@liberal:
I think the problem is that what John is talking about happening and why the right-wing talked up Ireland aren’t related. The crash had everything to do with the property bubble popping and not corporate rates being low relative to other countries.
Alex S.
On the one hand, I have to smile about this story because it validates Paul Krugman’s theories about too much austerity, and my own theories about the frailty of finance based economies. On the other hand, I’ve had to realize that Ireland is pretty much fucked.
“Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output. Of that, German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively.
To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn’t sound altogether prudent, does it?
As for direct bank-to-bank lending, overseas banks have provided Ireland’s banks with €169bn of loans, which is also greater than Irish GDP.”
And while it’s true that the Irish standard of living has increased significantly, it was built on a bubble that someone else will have to pay for, either the Irish population, that has endured 2 years of austerity already and is in for 10+ years of the same, or the EU will pay once again, or british and german banks will have to write it off, which might cause other banks to collapse…
Just as a comparison, the Irish annual deficit is bigger than Greece’s. And I wonder if Portugal and Great Britain will suffer a similar fate.
Wile E. Quixote
The “miracle” of the Celtic tiger was also paid for by massive EU subsidies for upgrading the Irish infrastructure. The Irish were sort of like American southerners who brag about their low state tax rates while sucking down massive quantities of federal cash. If the more developed countries of the EU hadn’t poured billions into Ireland to upgrade the infrastructure most of the companies that have relocated there wouldn’t be there.
burnspbesq
@Linda Featheringill:
“I think that the point being made here is that the current retraction is so big that tax breaks to corporations, etc. won’t turn things around.”
I might not fully agree with that. I still think that Congress should make the research credit permanent, and decide once and for all about Internal Revenue Code Section 954(c)(6) – either make it permanent or repeal it once and for all – the uncertainty about whether these and a host of other corporate tax breaks are going to be extended every year results in a pure dead-weight loss. But on balance that’s a fair point.
Dave
@Alex S.:
I don’t think the UK will…they are strong enough to take a hit and survive like the US. But Portugal….? That’s another story. And the one no one wants to talk about…Spain. If Greece, Ireland, Portugal and Spain fall off the cliff, you’ll have 25% of the Eurozone countries needing a total bailout by the other 12. Is that even feasible?
Alwhite
Ignored in all of this is that the lower marginal rates that Ireland has result in a LARGER tax bite than the, higher, US rates. Read that again & let it sink in . . .
The US law is so riddled with loopholes that US corporations actually pay less in taxes than the “stars” of the EU. So if you want to play this game I’m on board. Lets lower US rates to the Emerald nirvana but do away with all the bullshit exemptions so that they end up paying more in taxes as they would in Ireland.
burnspbesq
@Wile E. Quixote:
Speculative, unproven, and unprovable, but I’ll play: where would they be?
R. Porrofatto
I didn’t know that the Community Reinvestment Act extended to Ireland. Maybe his real name is Blarney Frank.
Comrade Javamanphil
@Dave: Perhaps I am oversimplifying for comedic effect (on the internets?!? Unpossible!) @burnspbesq ‘s argument. I still think it ignores the likely role deregulation and low corporate tax rates actually played in creating the very crisis that now prevents this model from working. These policies created a bubble. The fact that this was occurring the world over, exacerbating the problem is immaterial to the central flaw of this strategy. Every country cannot have the lowest tax rates and least amount of regulation and the race to be that country ultimately creates bubbles based on speculation and free capital. I often point to Vermont’s relatively healthy economy and real estate market in the last few years and the likely cause of this was sensible regulation that did not allow excess supply to enter the market at a ridiculously accelerated rate (see Vegas & AZ.)
Nice article here on Ireland’s long term problems.
(Edited to change an “and” to an “at” and to make my example not look like I was saying Vegas is in AZ.)
burnspbesq
@liberal:
Somalia has a graduated corporate income tax with a maximum rate of 35 percent. Collection may be an issue in some cases. ;-)
Alex S.
@Dave:
About the UK, just today I read about the declining consumer confidence which is probably caused by cuts in the public sector (that were supposed to reestablish confidence). I’m far from having the total overview, but there are some ominous signs along with the british dependence on their finance sector and the limited housing boom of the Blair years, which I think was mostly limited to a few prestigious projects in London, but still… The involvement of British banks in these troubled areas could become too much at one point. Though London should be far better suited to save itself, that’s certainly true.
ciotog
Most of my Irish friends, all professional people who’ve seen their tax rates go way up in the last two years, are now trying to emigrate. Life in Ireland is indisputably better than it was in the 1970s–if nothing else, the steep decline in the birthrate would have ensured that–but things are going to be bad there economically for a long time.
Martin
@burnspbesq: Not really. The tax collectors carry AK-47s and ride around in Toyota pickups with machine guns mounted in the back. Granted, they don’t work for the government, but they do engage in soçialistic income redistribution.
Wile E. Quixote
@burnspbesq:
No more speculative, unproven and unprovable than the contention that Ireland’s low corporate income tax rates were the reasons that companies relocated there. Those companies would have relocated to some place that had modern infrastructure, which Ireland didn’t before the EU began pumping money in. As you pointed out companies are not falling all over themselves to relocate to Nicosia, despite the low Cyprian corporate income tax rates. Were it not for these subsidies Ireland would be Cyprus, albeit Cyprus with a lousy climate, terrible food and hordes of child molesting Catholic priests.
mikefromArlington
I don’t think the corporate tax rate brought them down. It was the housing bust and the tax laws surrounding it. Everyone was investing in Irish property. So much of its economy and Govn’t was supported by that. When the bottom fell out, so did Ireland and all the loans backed by their banks.
El Cid
I remember the 1997-8 “Asian Financial Crisis” caused by massive Western currency speculation, in which the super-smartest in any room Western advisers told the various Asian “Tigers” that unless they devalued their currency and cut their budgets massively (sound familiar?) they’d pay terrible consequences.
Malaysia said “Fuck you and your bullshit advice,” clamped down on currency speculation, massively intervened in and supported the domestic economy, the US’ financial institutions (US officials and the IMF that it dominates) and the press predicted imminent catastrophe. They rejected taking more IMF short term loans and thus refused the IMF’s ridiculous austerity programs.
Indonesia, for example, followed the IMF’s advice, and one of the good things to come out of the vast suffering was the overthrow of US-installed and backed tyrant Suharto.
Malaysia suffered less (though it too suffered massively) and pulled out of the crisis much faster with fewer lasting consequences than any of those foolish enough to follow the West’s brilliant and beneficent advice.
And just like now, after fetishizing austerity, the IMF later admitted it was wrong and that the policies it advised made the situation worse. Oops!
cyd
@burnspbesq:
The question is how long that will take. After the 1997-1998 crisis, the original Tiger economies bounced back incredibly quickly. But this was because their depreciated currencies (e.g. the Korean won had halved in value) allowed them to export their way to recovery. Ireland, by contrast, is saddled with the Euro.
So I would argue that the Irish paradigm, sans Euro, works; this is the same paradigm that’s worked in East Asia over decades. With the Euro, they’re fucked.
Brachiator
@Comrade Javamanphil:
One irony in the Telegraph piece:
But back in 2004, a BBC news report made the following assesment:
None of this is meant to beat up on the Irish, but to point out again the global nature of the current economic crisis. And I also like this bit from Paul Krugman’s most recent blog: “I have had a lot of downbeat stuff to say about Irish policy and prospects. But having their position worsened by a warning from S&P is cause for justifiable anger on their part. For the fact is that the rating agencies, S&P very much included, have been terrible on sovereign debt. There is, in fact, a disturbing contrast between their willingness to classify highly dubious private securities as AAA and their willingness to classify governments as probable deadbeats on very weak evidence.”
El Cid
@cyd: Well, with the need to keep emphasizing the massive combination of government assistance in, direction of, and investment of the Asian tigers’ economies, as well as highly protectionist policies at home. It might be a lot of things, but it certainly can’t be considered some sort of free-market export success model.
burnspbesq
@Calvin Jones and the 13th Apostle:
“How long until the requiste McAdled post saying this will all blow over, Ireland will get paid back in 9 months, and the booming Irish economy will resume soon?”
In which McArdle says none of those things (and rightly so, because at least one of them has no realistic chance of being right).
http://www.theatlantic.com/business/archive/2010/09/irish-woes-get-worse/63837/
The Irish government is likely to own significant stakes in Allied Irish and Anglo Irish for at least as long as the US Treasury is going to own a significant stake in AIG after the upcoming recapitalization gives the Treasury 93 percent of the common stock.
I wonder if my kid will be alive when the Treasury sells its last share of AIG stock.
cyd
@El Cid:
The story is not quite as clear as you make it seem. The IMF’s advice was bullshit, it’s true, but Malaysia recovered at about the same pace as, say, South Korea, which underwent an IMF austerity program. From what I’ve read, IMF intervention during the crisis was basically useless, but not significantly worse than useless.
Also, one of the reasons Malaysia rejected IMF aid was that all the top politicians in the country take a cut from government-sponsored economic projects, and an IMF program would have necessitated clamping down on certain shady government. So their motives for keeping their own counsel were not altogether pure.
cyd
@El Cid:
Among the original tigers, South Korea and Taiwan dabbled with protectionism during the early stages of development. Singapore and Hong Kong have always been extremely open economies. The Singapore government has a very strong industrial policy; Hong Kong probably comes closest to being a free market export-led economy.
burnspbesq
In any discussion of government bailouts of banking sectors, it is useful to keep an eye on the US taxpayers’ return on their investment in TARP. My concerns about AIG notwithstanding, so far it hasn’t been bad.
http://www.theatlantic.com/politics/archive/2010/09/tarp-the-forbidden-bipartisan-success/63803/
Brachiator
@burnspbesq:
The government entanglement with AIG is amazingly complicated, and a good outcome hinges on a lot of probably unwarranted optimism:
The government is hopeful on the outcome of this deal: “The Treasury issued a statement Thursday saying the agreement ‘dramatically accelerates the timeline for A.I.G.’s repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company.’ ” But I think that we will have colonies on Mars before this thing is finally settled.
The tea party makes a big deal about being against government bailouts or looking at the Obama Administration as engaging in a sozul ist “takeover” of American business. I wonder what their position might be on the AIG/Treasury proposals.
Barry
@<a href="#comm"This isn’t like Greece, where no one knew how much the government was spending and people were cooking books"
A quibble – I'll bet that the big US, UK and European banks definitely knew how much the books were being cooked.
Barry
@cyd: “The story is not quite as clear as you make it seem. The IMF’s advice was bullshit, it’s true, but Malaysia recovered at about the same pace as, say, South Korea, which underwent an IMF austerity program. From what I’ve read, IMF intervention during the crisis was basically useless, but not significantly worse than useless.”
Which shows that the IMF’s intervention s*cked pretty badly. It comes with outside money, as well as outside strings. Malaysia forwent (?) the outside strings, but also the money which would have come with that.
Michael
@Brachiator:
I’m trying to figure if any value is brought brought to finance by these fuckwits, but have been drawing a blank.
Honestly, if every ratings executive and every analyst was lined up on a wall at the beginning of the Revolution, I’d see it as a positive.
Brachiator
@Michael:
And adding insult to, well, more insult, the ratings companies want their decisions to have power and yet also don’t want to be held accountable for misjudgments:
Moody’s and S&P’s defense is that their ratings are opinions protected by the First Amendment, and so it doesn’t matter if they are factual in any way.
Kyle
Even shorter burnspbesq: My high-speed driving technique was fantastic up until I skidded off into that tree. Maybe I shouldn’t have removed the brakes to save some dead weight.
jh
One of my old finance professors (Capital Markets and Portfolio Theory) later went on to become Executive VP of Anglo Irish. I listened to a talk he gave at talk on capital markets back in 2008, right when things were going sideways in a major way for Ireland.
This is a very, very smart guy and he was unsurprisingly optimistic about Ireland’s prospects for recovery. Of course everyone in the room knew he was “talking his book.”
Ireland’s progress over the past 10 years was predicated on the creation of asset bubbles in real estate, massive subsidy from the EU and relatively low tax rates.
As a nation, Ireland has many things going for it but the scenario that fueled its recent growth isn’t going to be coming back. At least not in its entirety.
Michael
@Brachiator:
Well, if you’re going to take the position that you’re no more responsible than your average racetrack tout, then you shouldn’t expect to have all this gravitas that gains you a bunch of commerce.
Binzinerator
Who stole me Lucky Charms?
burnspbesq
@Kyle:
Fail. Most of the time I manage to avoid saying anything as abjectly stupid as your mischaracterization of what I said. Not always. But most of the time.
Feel free to try again.
Dave
Ireland’s biggest problem (imo) is being tied to the Euro right now. It severely limits their ability to get out from under this disaster.
Bulworth
Free Market economics has never failed. It has only been failed. Also, too.
Pangloss
I think I heard Newt Gingrich recently say that we needed to use prison labor to make toxic baby toys in underground sugar caves if we want to be able to compete with China…. or something like that.
Pangloss
Is Ireland the one with the beaches and the samba music or the one with the scratchy woolen sweaters?
Nathanael
At least Ireland owns the banks they’re bailing out.
In the US, no no we couldn’t NATIONALIZE, so the bailouts are going straight to corporate execs and a little to stockholders.
Nathanael
@Dave: Spain will be fine, and odds are Portugal will too. Spain had the advantage that the government *plowed* the money from the boom into infrastructure, and has the further advantage that they’ve refused to go austerity-mad — and has the final advantage that their bank regulation was much MUCH stronger so very few of their banks are hiding enormous losses. They are accordingly doing better than Ireland
Brachiator
@Nathanael:
At least Ireland owns the banks they’re bailing out. This is not necessarily a good thing.
I don’t know what magic trick people think comes from nationalizing banks.
The British partially nationalized some of their banks in dealing with the financial crisis. One of the banks bailed out, the Royal Bank of Scotland was 84% owned by British taxpayers, but still ended up having to sell 318 of its branches to Spain’s Santander group. The upshot: “Some 1.8 million retail customers and about 244,000 SME customers will see their accounts transferred.”
Iceland nationalized their banks, and they are still in a jam (and bank equity has tied up about 30% of Iceland’s GDP).
burnspbesq
@Brachiator:
Theoretically, one of the advantages of having a “bad bank” is that it can be very patient in seeing whether currently nonperforming loans can get back into accrual status. If not, it will become like the RTC was in the wake of our S&L crisis – the owner of a very large portfolio of commercial real estate, which it can operate and dispose of as market conditions warrant.
Brachiator
@burnspbesq:
Very good point. I haven’t kept up on this aspect of the financial mess, but I seem to recall Sweden receiving kudos for the way that it used “bad banks” in handling that country’s financial crisis in the early 90s.
I would think that it would require some discipline (to resist caving to political considerations) and an underlying strong economy to pull this off.
Ah, here’s an NY Times article on the Swedish bad bank response (Stopping a Financial Crisis, the Swedish Way).
I also get the impression that Sweden completed the entire process within a few years.
CalD
I don’t think they have tigers in Ireland.
mclaren
My relatives are Irish. “The Celtic miracle” was crap. There’s a reason it’s called “blarney.”
Texas Dem
Since my ancestors hailed from Scotland, not Ireland, I’ll just quote Lt. Ripley: “I say we take off and nuke the entire site from orbit. It’s the only way to be sure.”
Wilson Heath
Ireland had low corporate tax rates for about a decade before the economy took off. A factor, likely, but certainly not the sole or proximate cause. There were changes in Irish corporate law in ’86 and ’90 that offered some strong protections to investors. This was part of a general societal move that privatized under performing state-owned company and stopped protecting state companies from competition. To a certain extent, the only way the economy can go from there is up. I don’t know from experience, but the anecdotes I’ve encountered from the early 80’s in Ireland are basically textbook for “rent seeking.”
EU “structural funds” and cash grants to companies from the IDA also factored in. It’s kind of like the incentives that state and local governments will pay to big employers to lure them in. Especially to the extent that someone else is left paying all or in part. Ireland got special allocations as a periphery/cohesion country in the EU. (Here in the U.S., state incentive laws are often drafted specifically to gross-up the incentive value by stiffing the feds for what would otherwise be taxable income to the receiving company.) This all doesn’t look unlike the sort of private-public partnership malarkey along with deregulatory and non-regulated approach as ran rampant through the Clinton years and beyond. It doesn’t end well for society, though it goes good for business until they need more public teat to meet their quarterly profit targets.
Wilson Heath
@burnspbesq:
To hell with the research credit. To hell with all the general business credits. There’s no reason for them other than as spoils for politically favored industries. You’ve got costs, deduct them like anyone else. The green energy-ish credits? Kill the non-economic oil/gas/coal subsidies for the same or better impact.
I don’t believe that government should pick winners through the tax system or other regulatory regimes. In part because I don’t trust that choices will be made in the interests of the whole society. But also because these things are like the undead once they’re in law. I forget which oil industry tax benefit goes back to the Korean war, but it’s never left us as apparently the justifying crisis has never left us. Or the carried interest nonsense making banking industries more profitable on the back of revenue losses to the Fisc, drawing mathematical minds away from doing anything useful for society.
burnspbesq
@Wilson Heath:
As a general proposition, I agree with you. The tax system should do nothing more than raise the revenue the government needs, as fairly and efficiently as possible.
Alas, that’s not the world in which we live. Given a choice between a direct cash subsidy to a favored industry or activity, which is really easy to see, and a tax incentive, which is easier to obfuscate, we know which one Congresscritters are going to choose every time. The research credit has been around so long that a huge body of corporate taxpayer expectations has grown up around it, and now is (IMO) not the right time to fight that battle.
Wilson Heath
@burnspbesq:
No, not with the ongoing Korean crisis.