On economic orthodoxy

Mr. Chakrabortty reverses the argument.

Unnoticed it may be, but Reykjavik now serves as a very different kind of parable, of how to minimise the misery of financial collapse by ignoring economic orthodoxy.

Eh? What Iceland did is against economic orthodoxy?

These policies were not just controversial; they represented a two-fingered salute to the polite society of academics and policy-makers who normally lay down the laws on economic disaster management.

Umm, no.

Compare Iceland\’s policies with those followed by another tiny country in the North Atlantic, which also has a banking industry much bigger than its national economy. When the credit crunch came to Dublin, the government decided to underwrite the entire banking industry – including tens of billions of euros of loans made by foreign investors. That landed the country with a debt worth something like €80,000 for every household – a debt that effectively bankrupted the country.

That bit is true, yes. The Irish decision to guarantee the banks\’ debts was the most stupid one possible. The worst mistake of the entire experience.

But what our economics leader writer for The Guardian has missed is that he\’s got the orthodoxy thing the wrong way around. What Iceland did is orthodox, what Ireland did was unorthodox (as ewll as rampagingly stupid).

If you can\’t pay your debts then you don\’t pay your debts. This applies to nation states as much as to bankrupt companies. There\’s even a whole book about how many times this has been done. 800 times over the centuries in fact.

When national debts get too high then nations default. Everyone licks their wounds, takes the haircut and things then carry on.

It\’s actually us neo-liberal right wingers (I can think immediately of myself, Guido and the ASI as all having said the same thing) who have been saying: default you fools!

To find that we who have been screaming economic orthodoxy, urging the Icelandic solution on all, now being described as unorthodox is really rather grating.

10 comments on “On economic orthodoxy

  1. No. Chakrabortty is correct. from a certain point of view. Current (ie Guardian) orthodoxy says that people are not normally capable of taking full responsibility for their decisions and actions, and must be prevented from taking some decision and actions, and then absolved of responsibility of many of the decision they do take.
    Current (ie Guardian) orthodoxy therefore says that we bail people out. Even banks. Not your orthodoxy – or mine – but his.

    Then Iceland comes along, does something different to *his* current (ie Guardian) orthodoxy. And it works. Then Ireland comes along and does something *different* to his current (ie Guardian) orthodoxy. And it doesn’t work.
    And then, once the horse has successfully been led to water, it fails to take the drink! It concludes that it must have been *someone else’s* idea to bail out people, debtholders, forge steelworkers, bankers and anyone else who doesn’t fancy facing up to consequences.
    Numpty. The only reaonsable conclusion he could draw is that people (including companies) should be made to face consequences.

  2. “It’s actually us neo-liberal right wingers (I can think immediately of myself, Guido and the ASI as all having said the same thing) who have been saying: default you fools!”

    Oh come on! Tim meet IMF policy in the 80s and 90s, IMF policy in the 80s and 90s meet Tim.

    Were the last few decades characterised by structural adjustment programmes or default? I’ll give you a clue, it wasn’t default.

    No you might (sensibly) disagree, but in policy circles and until very very recently, Ireland’s actions were the “Serious” option and Iceland’s were “bad.”

    Tim adds: Tsk, and you an economics student as well. Note, all of the IMF prgrammes were and are AT THE SAME TIME as default.

    Default gets you out of the debt trap. The structural adjustment is to make sure you don’t go back into it. Argentina? Default. Uruguay? default. Mexico? default. etc etc.

    Agreed they didn’t just wave two fingers and walk away…..but all lenders took haircuts.

  3. It isn’t even a matter of not paying THEIR debts. Iceland is not paying (well not in full) their banks’ debts.

    There is nothing economically orthodox about saying government has to pay the debts of bankrupt businesses. Indeed doing so is completely unknown outside the magic circle of banking.

    Bankruptcy is a vital, indeed perhaps the single most important feature, of free enterprise societies. It provides a mechanism to stop uneconomic businesses from contiuing to consume resources. When government departments lose money their budget goes up, which is why government is a net parasite. This has now been extended to banks.

  4. “Tim adds: Tsk, and you an economics student as well. Note, all of the IMF prgrammes were and are AT THE SAME TIME as default.

    Default gets you out of the debt trap. The structural adjustment is to make sure you don’t go back into it. Argentina? Default. Uruguay? default. Mexico? default. etc etc.

    Agreed they didn’t just wave two fingers and walk away…..but all lenders took haircuts.”

    Yes there were defaults, but there were a lot of countries who were not allowed to default and who were told, undertake these reforms and keep paying our bosses/your creditors. For example Asia!

    http://en.wikipedia.org/wiki/Asian_financial_crisis#IMF_Role

    Tim adds: Asia? A country?

  5. “Tim adds: Asia? A country?”

    Yes, next to fuckoffyoupedantistan! haha

    Fine read “many of the countries “helped” after the Asian Financial Crisis.”

    The point remains.

  6. Left Outside said: “No you might (sensibly) disagree, but in policy circles and until very very recently, Ireland’s actions were the “Serious” option and Iceland’s were “bad.””

    Political orthodoxy is not the same as economic orthodoxy and in these circumstances the two are in conflict.

    The reason why Iceland’s decision was “bad” is that *it is* the economic orthodoxy and it serves to highlight the contrarian nature of the political orthodoxy. That political orthodoxy was bigger is better and safety in numbers (imo to avoid accountability more than anything else). A herd may well be a safe place to be most of the time but a stampede can still run right off a cliff.

    The quicker things are back to real growth the better for all concerned. The markets wanted to shit out the bad investments but the biggest players standing to lose the most (inc. Government credibility) lobbied for the nationalising of them into an unmanageable taxpayer debt burden. Beggaring public services for decades to come wasn’t acceptable to the Icelandic people. It should never have been acceptable to us either but we did not get on the streets and neither Government or Parliament were interested in asking us.

  7. LeftOutside, the Asian countries were “allowed” the option of defaulting (“allowed” in the sense of, the IMF couldn’t have stopped them if the countries had insisted on it).
    The deal the IMF was offering was that if you undertake to do these reforms, we’ll bail you out, so you don’t have to default. Generally governments have a motive to avoid defaulting out of fear of higher interest rates in the future, which is why countries tend to go along with the IMF deals, because otherwise they’d be looking at even tougher cuts in government spending.

  8. LeftOutside:

    There’s a massive difference between “a country borrows the money, a country pays it back” and “some dude borrows the money, the country he’s from pays it back”. The IMF defaults you’re talking about are the former; Ireland is the latter. That’s why it’s so gibberingly, madly insane.

    We’re not even chasing Iceland for the Icelandic banks’ liabilities. We’re chasing it for the very narrow class of liabilities which involve individual borrowers whose deposits, in the event of the bank collapsing, were supposed to be guaranteed by the Icelandic state.

    Ireland, on the other hand, guaranteed that the Irish taxpayer would pay back the Bank Of Foreignia’s loans to Irish property developers to build failed resorts in Spain. That’s why, although normally I’m wary of libertarian/anarchist suggestions that the people hanging the bastard politicians is the best response to a financial crisis, Ireland’s the best real-world example where that might be true.

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