Every weekday morning, I brush my teeth while listening to the business news on Morning Ireland. Once the weather comes on, I know it’s time to spit.
The presenter’s mame is Emma. She sounds very glamourous and by jove, does she know her business. She’s all about credit ratings, bondholders, soveriegn debt and the EU-IMF bailout. In fact, these are some of her favourite things. She interviews chief-executives, London traders and business-market leaders at break-neck speed, firing at them an alarming assortment of questions which I don’t comprehend.
I’m not a scientist or anything, but I think there might be a critical period for developing business accumen. At school, while other students were learning about the stock exchange and interest rates, I was declining Latin nouns and checking out cartoons of Roman boys in togas.
As a result, I simply don’t get economics. When I see images on TV of old men in high-rise glass buildings pouring over computer screens at changing numbers and getting very excited, I just think “huh?”. When people talk about “burning the bondholders” I get a mental image of Shakespeare’s Shylock being burnt at the stake. I’m absolutely baffled that a body with as temperamental a title as Moodys can dictate at a whim the direction of markets values.
As regular readers will know, I’ve some desire to make it in the world of journalism. Back in the day I thought this might involve composing a few witticisms on farcical political characters, or being sent to cover a dull Dáíl debate on fishing quotas. Now, to my horror I’ve discovered that the whole world functions on principles I do not understand. In an attempt to salvage my career prospects, I looked for measures to reduce my deficit.
Oh, how I googled. Oh, how I typed search terms like “bond holders”,and “bailouts” into Wikipedia. Alas, it was like a never-ending economic web, with each explanation containing a further collection of incomprehensible fiscal terms, which in their turn had to be googled.
But then everything changed. I was walking past Trinity last week when something caught my eye. Perched on the top of a lamppost, like a beaming Evangelist was my answer: a poster with the title “Understanding the Euro Crisis”: an invitation to a public meeting on the subject: All Welcome.
It was like a sign from the heavens.
The speakers advertised included Pearse Doherty and Fintan O’Toole. I was sure they wouldn’t let me down. After all, they’re all about bringing it back to the people.
As I left the house last Thursday night I called back “just off to a Sinn Féin meeting. Might be late..” before slamming the door.
There was a spring in my step as I got off the luas and made my way to The Shelbourne. I had brought my notebook with me so that I could jot down key economic terms with which to regale my friends in the future. I felt like a proper journalist.
Outside the Shelbourne, a group of middle-aged Americans was getting ready for an expensive meal in the city. I know this because the ladies were dressed in exquisite skirts with lace trimmings and because the mean were smoking cigars. And because they were outside the Shelbourne.
I approached the doorman who was guarding the rotating glass entrance door.
“Good evening, Madam” he said with a gallant Polish accent.
“Hello there”, I replied, deilghted at his attentiveness. “I’m here for the public meeting”
“The Sinn Féín talk, Madam?”
“I believe it is full, Madam”
I gulped. It could not be.
“Oh what a shame!” I replied, downcast, imploringly.
He paused. “Maybe if you wait a few minutes for people to be seated we may be able to accommodate you”
I beamed. What a sterling human being he was.
As I leaned gracelessly against the railings I watched the traffic that was making its way in and out of the building. Some wealthy Arabs, more loud Americans and some glamourous French. And then a steady trickle of grubby Dubliners in hoodys and jeans. Again and again I heard the phrase “I believe it’s full, Sir”
I became alarmed. After some time I returned to my Polish friend and asked him what my prospects were.
He must have sensed my economic passion. He sighed “You may go in Madam. Turn left at the pillar and enquire there whether you may enter the meeting”.
I almost stumbled in my excitement and as a result briefly got stuck in the rotating door. Once in however I rushed to the attendant by the pillar.
“Excuse me, I was wondering whether there might be space for me in the meeting?
“No, It’s full”.
What. With those three words my heart sank.
My bubble burst, I turned away dejected and slumped out the rotating doors, past the doorman and back to the luas stop.
€3.50 for a return luas fare only to be turned away at the door! What an absolute waste. Needless expenditure. That’s exactly what got us into the mess we’re in.
Brrrrilliant! Loved this katzi!
And I love you. It all works out.
Well, Kate, it’s very easy: The difference between family economics and world economics is the position of the word NOT:
In family economics you MUST NOT spend more money than you have, because spending more money than you have leads to an economic crisis and in the end to a collapse of the system
In world economics you MUST spend more money than you have, because NOT spending more money than you have leads to an economic crisis and in the end to a collapse of the system.
Why? Well, that, I admit, is the only point I do not understand….
It’s always great to read you blog! / Désirée
Thanks Désirée! It certainly seems intuitively true that for the individual, spending more than you have is not a good idea but that when it comes to world economics it’s very hard to find a country not in debt.. ay ay ay, it’s all too hard for me! Hope all is well in Vienna. I plan on spending next summer there. It’s such an inspiring place 🙂
I love the variety of economy based puns. “reduce my deficit” “my bubble burst”. etc
I hope some of them were unintentional
Though I have to say I did take issue with this one:
“Needless expenditure That’s exactly what got us into the mess we’re in.”
Actually, despite what right wing propoganda is telling you, government expenditure had almost nothing at all to do with the mess we’re in now. Ireland prior to the banking crisis actually had one of the best government debt and deficit ratios in the EU. The problem is that:
a) The banks collapsed, because they’d lent out far more money than they should have, and they owned a lot of debt in bundles from other banks, which they’d been told (by ratings agencies) were really good bundles (“prime loans” meaning low risk) but in reality many of them were “sub prime loans” (this means a high risk of default, which is what eventually happened).
In order to stop the entire banking infrastructure of the country collapsing (businesses rely on banks for short term loans in order to stay in business, and also for start up loans, therefore it was very important that didn’t happen, without even bringing up the fact that foreign businesses would), the government spent TONS of money trying to prop up these banks, and buying their failed loans off them etc etc.
b) there was a housing bubble, so when that collapsed, people stopped having jobs, and starting claiming dole (and since they didn’t have jobs any more, they stopped spending money, so the people who sold the stuff they’d been buying were unemployed too, and then THEY started losing money).
If you mean the needless expenditure of *consumers*, you’re perhaps partially right, Irish individuals (not the government) had much higher debt than other countries. However, given that house prices were super high, this is not unexpected really. However, much of that debt was investor based, rather than Joe blogg’s desire for a Porsche (in fact, new car sales have gone up this year, the only sector to do so). However, I’d blame that (much like I blame the banking collapse itself) on the banks, rather than the individual consumer. Who should know more about whether someone can afford a loan, a regular person, or a professional banker who’s job it is to decide if someone can afford to repay a loan? Exactly!
If you’d actually like to learn a little bit of the basics, I’d love to discuss it with you, perhaps over tea in my fancy new apartment? Do you have my number?
FYI “burning the bondholders” basically just means that Bondholders (these are a particular type of invester, like a shareholder, but different) would lose all the money they invested in the banks (which would save/give the government a lot of money, and make joe bloggs feel some sense of fairness). The reason they’re thinking about not doing it is that they’re afraid it will mean people will be afraid to invest in the banks in the future.
Darren, you have an immense talent for putting things clearly!
(a) I think I understand! Thank you 🙂
(b) So are bondholders just super-rich individuals who decide to invest their money in banks on the assumption that they will be profitable? I’m confused about whether the relationship is symbiotic (the banks need the bondholders to invest and the bondholders need the banks not to fail)? You see, if banks need bondholders but governments are too scared to burn the bondholders in case they don’t re-invest then surely ALL the power lies with the bondholders? This doesn’t seem like a good idea..? Would it not be better not to offer enormous bank shares to a small number of powerful individuals but rather to divide shares among an enormous group of small investors so that it’s in everybody’s interest for banks to be propped up collectively?
I mean if we burn the bondholders the banks could fail. If the banks fail, they won’t lend to businesses. If that happens people will lose their jobs, not spend, claim the dole etc.. So really bailing out the banks doesn’t seem as ‘fat cat’ and removed from Josephine Blogs as I had been led to believe.. Would burning the bondholders really help Mr Everyman?
I think I should go to Dr Quirkey’s… for my education.
Thanks very much Kate, I am genuinely flattered 🙂
“So are bondholders just super-rich individuals who decide to invest their money in banks on the assumption that they will be profitable?”
Yes, pretty much exactly that. They give the banks money, and n return, they get regular payments. It’s a bit like giving loan in a way.
The relationship is symbiotic, the banks get money, which they use to run their business, and the investors get regular payments in return. It’s a lot like a loan really.
“You see, if banks need bondholders but governments are too scared to burn the bondholders in case they don’t re-invest then surely ALL the power lies with the bondholders?”
That depends on your opinion. The government have it within their power to simply keep the bondholders money should they want to. And this bondholder power thing is temporary. If banks were performing superbly, then banks would be able to pick and choose who got to be their bonholders, meaning they would have the power.
“Would it not be better not to offer enormous bank shares to a small number of powerful individuals but rather to divide shares among an enormous group of small investors so that it’s in everybody’s interest for banks to be propped up collectively?”
I think so, but that’s not how capitalism works unfortunately. (bonds aren’t quite the same as shares FYI, but they’re…pretty much the same. Banks tend to use both methods to collect money). The government is willing to burn the shareholders to a certain extent though, because they have less leverage.
“I mean if we burn the bondholders the banks could fail. If the banks fail, they won’t lend to businesses. If that happens people will lose their jobs, not spend, claim the dole etc.. So really bailing out the banks doesn’t seem as ‘fat cat’ and removed from Josephine Blogs as I had been led to believe.. Would burning the bondholders really help Mr Everyman?”
Where the fatcat element really comes in is that the people who caused this mess by and large got away with it. There wasnt sweeping management change, and the people losing their jobs in banks are mostly the lower earners. They could have retroactively taxed them (other countries have done this in the past) at the very least.
But you are right, if the banks had collapsed, it would have been bad for everyone.
Whether burning the bondholders would help Mr Everyman really depends on your opinion, and their reaction. If burning bondholders has NO impact on future bond investment in banks, then it is absolutely the right thing to do, the government would get very large sums of money (as well as giving people some semblance of fairness). If however, it would massively reduce future investment, then it’s a bad idea.
Personally, I think reality is closer to the first one, as there is currently very little confidence for investors (so investor confidence is at a massive low), AND, people are aware that this is a special circumstace.
I’ll explain why almost all government keep debt another time, if you’d like. (estonia for the record have a constitutional requirement for a balanced budget). But that might be best done in person. For realz, let’s meet up!
“In family economics you MUST NOT spend more money than you have, because spending more money than you have leads to an economic crisis and in the end to a collapse of the system”
That’s a complete farce. Do you know anyone who’s ever taken out a mortgage? Millions of people have in Ireland alone.
THAT is spending more money than you have. Do you think every person who takes out a mortgage should be required to pay it back immediately? No. And it works perfectly fine, and absolutely nothing collapses.
*required to be able to pay it back immediately.
Totally fell in love with this piece. I must say, I have been following the news very closely these days. The entire debt leads most of us to believe that impending collapse seem imminent. It’s like all of us are spinning on a top, once it stops or nobody turns it anybody, it will just flop.
Is there any solutions – I am sure there are. However, there are also impending question of short term and long term solutions and if people are willing to stand together to resolve it together. Else it will be a tough battle indeed.
I wish I understood enough to form an opinion on this, Clariice! I’ve become so immersed in these terms and discussion yet I’m utterly baffled at how economies work.. It just seems like the whole system is greater than the sum of its parts and when it comes down to things as unsubstantiatable as “confidence” it makes me think of it as no more than an episode of “keeping up appearances”! Hope you are keeping well and still enjoying work. Hope you enjoyed Spain aswell 🙂
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