On Newsnight last night, Paul Mason reported on the economic crisis in Ireland that is now rapidly turning into a political crisis, and a European economic crisis, which in turn may well become a European political crisis. Reading his blog this morning, I see that he is now reporting on the fact that in Ireland, people are talking about a Second Republic. As he says, France has had five Republics, four of them came about violently, and the Fifth and current Republic itself came about as the result of a Coup d'etat in 1959, launched by DeGaulle. Waking up to find the news this morning headed up by reports of artillery exchanges between the two Koreas, and coming on top of minor clashes between China and Japan over claims to islands in the Pacific, I think ist safe to say we are living in increasingly interesting times.
I'm waiting to see Paul Mason's further blog reports setting out the details of his piece on Newsnight last night, but if I got the drift of what he was saying the events in Ireland, and the reason that European leaders have been so keen to force money on to the Irish Government, and why that Government has been holding out - Osborne has admitted that he has actually secretly been negotiating with Ireland and EU leaders for months! - is that Irish Banks have been operating as a kind of money laundering centre for European Banks, circulating money into and then out again of Ireland, to take advantage of differing tax rates. That, of course, illustrates ocne again, not only why we need the books of all the banks to be completely opened, rather than just the sham exercises like the Euro Bank Stress Tests, which happened in the Summer, but why it is ridiculous to try to build a Common Market without having within it, common fiscal as well as monetary policy etc.
The short version of his report was basically, if Irish Banks went down the whole of the European banking system would collapse. Its hard to see that happening without it bringing down US, Middle Eastern and Asian Banks too. That would be a Financial Meltdown several orders of magnitude greater than what we saw in 2008. In 2007, with the start of the Credit Crunch and collapse of Northern Rock, Governments stepped in to reassure savers, and prevent a run on the banks, by beefing up existing guarantees to savers on their deposits. In 2008, after lehman's collapsed, and such runs looked likely to spread, Government's rushed in to provide effectively limitless guarantees of savers deposits in banks. Ireland was the first to step in with such a guarantee, bringing down upon it the ire of its EU partners, who complained that such action was likely to see a flood of money from their banks and into Ireland, and would cause them to have to provide the same guarantees without the policy being commonly agreed. The UK, too introduced a guarantee of up to £50,000 per Bank for savings deposits.
The question now is what is that guarantee actually worth? It was introduced at a time when Governments thought that the chance of anyone every claiming on it was pretty remote. If any Bank failed it would be likely to be a small one, and the options of either the State taking over the Bank, as it did with Northern Rock, and RBS existed, or for the State to encourage and facilitate other Banks to take over the stricken Bank, as they did with Lloyds take over of HBOS, and Santander's takeover of a number of small banks. Rather like the Liberals could promise to vote against any increase in Tuition Fees, prior to an election they had every reason to beleive they would lose, and so it was a promise easily made, but has been just as easily broken having found themselves put to the real test, so the promise to guarantee deposits was easily amde by Government's who thought they would never be called upon to keep it.
Yet, the Ireland events show that even a nationalised Bank such as RBS could be severely tested if the Irish Banks go down, because it is committed itself to the tune of billions of pounds lent to them. Even so, its likely that the State, could stand behind it to prevent such an eventuality, though with Bankers looking to pay themselves bonuses of billions at Christmas, the Tories might have difficulty justifying bailing them out again. However, if the European Banking system collapsed following a collapse of the Irish Banks, could the State fulfil its promise, guaranteeing the deposits of every saver in every Bank - after all anyone with more than the £50,000 limit (£100,000 per couple) will have divided their savings up across a number of Banks - if they go bust, or their is a run on them leading up to such a collapse? It seems unlikely.
And, of course there are lots of precedents for Governments reneging on such promises. The Liberals reneging on their pledge to students is just the latest example. But, the Tories reneged on their pledges made at the election on Tax, on Benefits, on the NHS etc. too. But, in fact such breaking of promises is pretty normal. As I set out in my blog Cut & Run, the State conned people into handing money over to it rather than paying into their own Friendly Societies and so on to cover their needs with the promise of a National Insurance to cover them against Sickness, Old Age, and Unemployment. They had to wait another 50 years before they got the NHS, most of them never lived long enough to collect their Pension - and now they are the State is reneging on that promise by cutting the payments and telling them they have to work longer - and the first time the State was tested in relation to Unemployment, in the 1930's, it responded by reneging on its promise once again by slashing Unemployment Benefit just at the time workers needed it most!!! Who can have any faith whatsoever in the promises made by the Capitalist State? Well, probably on the experience so far, only the Bankers who get bailed out whatever the conditions.
Even Jeremy Paxman on Newsnight, last night, was led to make a similar point. The bankers have shown just how clever they are he commented. Having caused the worst financial crisis in living memory, they are still pocketing billions, by getting the rest of us to bail them out. Even when the capitalist state does take them over it fails to exercise any kind of control over them, let alone introduce any kind of workers' control. The severity of the crisis was illustrated by another point. An economics panel consisting of Will Hutton of the Work Foundation, Gillian Tett of the FT, and irwin Seltzer of the Hudson Institute was assembled to comment on events. Back in early 2009 I wrote in my blog Paying For The Crisis, for millenia, when the State has run up massive debts it has got out of it, by inflation, by devaluing the currency, paying back its creditors with funny money. It would be odd indeed, if State's in that situation today did not resort to the same method. None of them, I wrote could actually say that was what they were going to do, because it would undermine it as a solution, and cause uproar, but that is, in the end what they would do. Last night, every one of this panel agreed. The right-winger, Steltzer, was, in fact, the first to admit it openly. They will inflate away the debt, he said, adding, if you like we can lend you some of our printing presses to print the money to do it.
And, in fact, as I have been saying for months that is exactly what they should do. They should print money to monetise the debt rather than sending these economies into the toilet with austerity measures. Those measures are already having negative effects. Greece has cut its debt ratio by 30%, but that is still less than it was due to have reduced it by. Portugal's debt ration has increased despite the austerity measures. That is before the effects of these measures and a more general economic slowing begin to take effect not only causing deficits to rise again, but reducing the numerator in that equation, the size of GDP. But, it will be no good monetisiing the debt unless other measures are taken to stimulate growth, and stabilise economies. That would not at the moment require huge fiscal stimulus measures, as the Japanese found themselves having to implement during the 1990's after they had let things slip too far. It does mean an end to the Cuts, and the implementation of some targeted stimulus to restore consumer and business confidence. But, time is a crucial feature here. The worse things become the fewer alternatives there are, and the greater the size of the interventions required to put it right.
As Steltzer put it last night, we are not talking inflation on the scale of the Weimar republic here. Not yet. But, if the course is not changed soon the alternative will be either a Great Depression, or a Great Inflation, similar to the Weimar. Worse of all, could be the onset of a Great Depression causing a large scale deflation, that prompts a massive inflation as a response.