Paul Krugman turns his attention to Ireland in Monday’s NYT column.Â Of course we’re flattered by the attention.Â But there’s an important point.Â The casual reader of the column could come away with the following narrative about the Irish crisis: lightly regulated banks made bad property loans.Â The government was mostly an innocent bystander, except for the tax revenue that came in from the property boom.Â Now the boom is a bust and those meanies in the ratings agencies are making the government pursue contractionary economic policies to maintain Ireland’s creditworthiness.Â And the USA could be like this in a few years.Â Â It’s a tempting story but one which omits a critical ingredient: crony capitalism, Irish style.
Because the government — which has been in power for 12 years (with some fringe adjustments to maintain a parliamentary majority) was not an innocent bystander.Â It was literally and metaphorically in the tent with the property developers.Â And if you’re looking for a tale of lightly regulated banks, wonder about banks with unrecorded large cash deposits, loans, and foreign exchange transactions, not with property developers, but with the man who served as the country’s Minister for Finance and then PM — Bertie Ahern — covering almost the entire span of the Celtic Tiger, with just a brief 3 year interregnum in the Opposition.
Even now as it struggles towards a banking sector bailout, the government is using a definition of “systemic” that appears to incorporate any lending institution with property loans.Â Which brings us to those awful ratings agencies.Â There seemed to be a brief moment of national unity where we could all agree that Standard and Poors had no business appearing to call for a change of government in Ireland.Â Except that they never said that.Â They said that the scale of adjustments needed in Ireland was so large, that it’s not clear that the current government had the credibility to implement them.Â Which is true.
And then there’s Krugman’s extrapolation of Ireland to the USA.Â Very different situations, although he probably has in mind the conservative love affair with Ireland’s corporate tax rate.Â But in terms of bank nationalization, for instance, you can nationalize the entire Irish system with 6 institutions.Â Â And, for all its flaws, the US political system has functioned without the corporatist veneer of “social partnership”, a supposed consensus-building system in the boom times that co-opted the union leadership in Celtic Crony Capitalism.Â One reason why there’s been so little protest in Ireland so far despite the cutbacks?Â Not obvious who would lead them.
So Ireland is going to struggle for the next few months, one initiative after another, with a sense of discontent that for now is poorly articulated and political paralysis brought on by 12 years in a tradeoff-free zone — but as the debt dynamics get ever more brutal.Â Â Krugman concludes –
And the lesson of Ireland is that you really, really donâ€™t want to put yourself in a position where you have to punish your economy in order to save your banks.
The lesson instead might be that a government desperate to save itself is not necessarily the best instrument to save the country.
UPDATE: Prof. Krugman has been reading the reactions.