Sunday, May 8, 2011

The Bad Luck of the Irish

link here to article

I posted this article for two reasons. It has a short quote from Keynes's prescient book on "The Economic Consequences of the Peace" which he wrote after resigning from the committee that wrote the peace treaty at the end of WW 1. Keynes understood that the treaty would bankrupt Germany. He did not predict the rise of Naziism as the political response, but something like that was bound to happen. Ironically, one of the purposes of the treaty was to limit the ability of Germany to rearm itself and threaten France. The treaty enabled Hitler to rise to power, and to ignore the treaty as he rebuilt the German military with the help of US investment banks, that bought and sold the German bonds which partially financed the effort.

The second point is about the role of the US Secretary of the Treasury (along with the ECB) in rejecting the IMF plan that would have allowed Ireland to reduce its debt, held by primarily by major banks, by a 33% reduction in its gross obligations. The IMF, which was uncharacteristically generous in its proposal, lost the battle and Ireland is stuck with a repayment plan that it cannot afford without sinking its economy. The author of this article compares the Irish settlement with the treaty that sank the German economy. He gives most of the blame to the US Treasury Secretary, who he accuses of having a double standard. The name given to this standard is the Stockholm Syndrome. It stresses the importance of holding debtors accountable for contracts, while enabling bankers to be rescued by government whenever they make bad deals.

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