For Ireland, a Question of Scale
Thursday 30 December 2010
by: Paul Krugman, Krugman & Co. | Op-Ed
Dublin, Ireland - A local resident walks past an abandoned tower block in the Ballymun Flat Complex in North Dublin. Developers began raising slums three years ago to make way for new, low-income housing. Halfway in, the funds dried up, leaving some residents to languish in graffiti-riddled, concrete skeletons. (Photo: Eoin O'Conaill/The International Herald Tribune.)
Many readers have asked how I reconcile my disdain for Ireland’s bank bailout in 2008 (and praise for Iceland’s refusal to put taxpayers on the hook) with my support for the bank bailout that took place in the United States the same year, via the Troubled Asset Relief Program.
The answer is that numbers matter. Morgan Kelly, a professor of economics at University College Dublin, explained the difference earlier this year in an op-ed piece for The Irish Times: Ireland’s bank bailout added up to a commitment that was about 15 percent the size of T.A.R.P.’s, but its economy is about one-hundredth the size of the United States’s. Mr. Kelly shows that economists cannot compare "the leviathan that is America to the minnow that is Ireland."
"What will sink us, unfortunately but inevitably," he wrote, "are the huge costs of the bank bailout,"
For the United States, the T.A.R.P. was only 5 percent of gross domestic product, so even if a large part of the money had been lost _ which it was not _ it would not have been a major contributor to the federal debt.
There have been other losses in the United States, largely due to the rescue of Fannie Mae and Freddie Mac, the nation’s two largest mortgage buyers. But those losses were not disastrous for the United States.
In Ireland, by contrast, the bailout made a potentially manageable debt situation catastrophic. Putting taxpayers on the hook for 5 percent of G.D.P. is one thing; putting them on the hook for 60 or 70 percent of G.D.P. is quite different.
Also, in October 2008, the United States faced the risk that the entire world financial system would freeze up, but this was not the problem the government in Ireland was grappling with.
What is particularly distressing is the determination of key players to rewrite history.
Wolfgang Schäuble, Germany’s finance minister, told the Financial Times in a Dec. 5 interview that "deficits were one of the main reasons for the crisis."
In what universe? Ireland and Spain were running surpluses on the eve of the crisis, and the situation in the United States was clearly driven by private-sector debt, not public-sector debt.
It was the runaway banks and the private-sector bubbles that caused the crisis.
The governments of Ireland and Spain began running deficits only after the bust.
Unless you define the crisis entirely in terms of Greece’s situation and ignore all examples to the contrary, statements like Mr. Schäuble’s make no sense at all.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2010 The New York Times.
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