Bubbles and Budgets

The Irish Government introduced their budget for 2009 on Tuesday, and the country went crazy. First of all the Government appeared to have been sleep-walking the first half of of the year, because all of the ministers, at least in public, appeared to be unaware that the bottom had fallen out of their 2008 budget, which is where the Bubbles come in. The Irish economy has been riding a real-estate construction and escalating value boom,which many chose to consider would go on for ever. It didn't.

There were two keys to the development of the problem. One was the recent great success of the Irish economy, the so-called Celtic Tiger, and some kind of delusion that we were teflon coated. The other was a changing banking philosophy. Banking traditionally has been based on the philosophy that you borrow long-term to finance long-term lending, and short-term to finance short-term lending. In recent years, someone, somewhere, got the idea that you would make a lot more money if, when short-term rates are low, you borrow on the short-term market, and lend, at much higher rates, on mortgages for example. You could make even more money if you give people mortgages for 100% of the price of a house, throw in additional funds to buy furniture, and don'y worry too much about their ability to repay. You could make evem more money if you package a group of mortgages, and sell them to investors: then you could issue even more mortgages. The problem begins, of course, when some people realise that these 'investments' they have bought have less value than they thought. Then banks become worried about the other banks to whom they are lending funds on a short-term basis, and they refuse to lend to them, so they cannot repay the short-term debt they already have outstanding. The result is the chaos we see in the banking industry.

Society here has been in an uproar since Tuesday. Everybody seems to have conveniently forgotten that we all participated in this delusion that we had, in some way, found the golden key to good fortune. We felt it was only right that our government should spread this wealth around. It is different now that the hair-shirt has been brought out. There is talk of new 'stealth' taxes, and a lot of emphasis on the demands being made on the poor. Well, in this deeply-caring society I don't believe that those who are genuinely poor need worry, and, as for the rest of us, as my mother used say, 'you have to pay the piper'.