The economic return of Iceland has proved that the joke was on Ireland

I lived in Ireland for most of this period, and really what caused the problem was the blanket bank guarentee which was introduced against the advice of Goldman Sachs. More specifically, the attempt to save a bank known then as Anglo Irish Bank (http://en.wikipedia.org/wiki/Anglo_Irish_Bank).

Now, Anglo Irish really only lent for construction development, and were majorly tied up with the ruling political party of the time, Fianna Fail.

This bank was not systematically important, but they were politically important. The government put approx 30 bn into this bank, and tried to pass it off as a loan. Eurostat, quite rightly said no, you'll never get this money back, and ordered Ireland to count it as debt in 2010. This spiked the irish debt levels, spooked the markets and led to the bailout of Ireland by the IMF and EU.

The worst part is, even though the agreement with these external bodies was to cut costs everywhere (in profession such as law, accountancy and medicine) the brunt of the cuts have so far fallen on poor people.

If one could go back to September 2008, a blanket guarenetee had not been issued and Anglo had been allowed to go bust, then ireland would be in a very different position.

That being said, Irish people appear to be taking austerity quite well, and given the demographics, will probably recover over the next ten years. This all could have been avoided, and while the EU certainly didn't want banks to fail, the majority of the problems were caused by Irish political corruption.

The worst part is, the party responsible for this will be back in power within ten years, where they will have a fourth shot at bankrupting the country. Ireland, my country, has serious issues with stupid governance which is mostly disguised by the willingness of the people to work hard and ignore the stupidity.

"mainstream camp thought otherwise" - otherwise to what?

"and followed their advice" - Really? So how is it that Ireland and the US and Iceland all responded very differently, if everyone followed the same flawed advice?

"we know who was right and wrong" - Much to my own surprise, we see that most of the solutions have worked to some degree, and the widely predicted great disaster has not occurred. Really the jury is still out.

That is to say, while his prescription may have been sound economically (I doubt it, but let's say it is for the sake of argument), politically it's just an excuse to pile on ever larger debts.

No, it is meant to apply to a government radically cutting spending during a recession.

It's true that you can avoid unemployment by borrowing money to pay people to dig holes and fill them in again. What is also true is that, without production there is no consumption. Digging up holes and filling them in is not production, ergo, consumption will not rise.

And yet Keynesian stimulus worked in Australia[1]. Australia was able to implement it properly because the Australian economy had run years of surplus budgets prior to the financial crisis.

The jibe about digging holes is disappointing and ignorant. The Australian program involved a one off payment to tax payers for immediate effect (which ended up supporting the retail sector at Christmas time), traditional infrastructure spending on "ready to go" projects (roads etc) for effect in a couple of months and a very large school building program where building usually started 6-9 months after the initial crisis. These programs were production and - more importantly - all supported employment.

TLDR; Keynesian economics works just fine when the government runs expansionary budgets when growth is needed and surpluses when growth is robust.

[1] http://en.wikipedia.org/wiki/National_fiscal_policy_response...

TLDR; Keynes advocated government spending on infrastructure (increased collective efficiency) not pointless hole filling.

Additionally, they aren't doing "pretty well" with austerity by any honest metric. Even four years after the GFC, their GDPs are still below where they were in 2007/2008, significantly in Latvia's case. Unemployment is extremely high (From 4%/6% in 2007 to 10%/14% today) and wages have fallen.

Where is the success story here?

Lat + Est Unemployment: (https://www.google.com/publicdata/explore?ds=z8o7pt6rd5uqa6_...) Lat + Est GDP: (https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&...)

Had Japan done a Iceland-style cleanout, they would probably be still striking fear into the hearts of governments and corporates everywhere.

So, yeah, Estonia might be doing fine by some short-term metrics, but in the long term austerity measures have done irreparable harm.

http://globaleconomicanalysis.blogspot.com/2012/12/kyle-bass...

The idea is not that you can spend your way out of debt, that would be silly. The idea is that you can and should spend money to compensate for lack of demand in a recession, because the markets overshoot. Once you are out of recession, you must pay back the debt.

So austerity when the economy is good, spending when it is bad. Anti-cyclical government behavior.

Austerity in a recession is pro-cyclical. As was predicted and Greece (for example) has shown, a government cannot save itself out of debt in a recession, because tanking the economy at a crucial time like that makes the debt worse (as percent of GDP, and that's the crucial number in terms of ability to repay).

Update:

I am German, "living within your means" is sort of part of my DNA, and not living within your means is going to cause problems. But timing does matter!

The "normal way" is much much better than deflationary expenditure cutting. Deflation increases the debt burden in real terms.

The underlying reason governments are following austerity is because protecting old people's benefits & pensions (the people on the credit side of the debt, i.e. claims on future production) is more important than growing the economy for young people, because that's how the votes are structured in the economies that matter (Germany in Europe). Politics and demographics are pro-austerity, not economists.

This is ridiculous. Economies recover from recessions and "Macro 101" people claim victory. But economies recover from recessions if you do nothing. Or you implement austerity measures.

>Most people who say "econ is not a science" have had little to no experience with people who conduct economics as a science.

People who "conduct economics as a science" have little or no connection to reality. They have grossly oversimplified models that fail to make meaningful predictions and congratulate themselves on the accuracy of their models in the complete absence of evidence.

Talk about cargo cult science. Economics isn't a science. It's just a way to fit the world into your political template.

The same people (Royal Swedish Academy of Sciences) also award the Crafoord Prize as well as others, but only the Economics one put "Nobel" in the name and the fact that this was done to improve the image of Economics is just history.

I don't think you're being accurate to say they differ "only in name". There is plenty of controversy about the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel being called "The Nobel Prize in Economics". The Nobel family doesn't like their name being attached to it since it wasn't Alfred Nobel that created it. Hayek was given the prize and stated that he, if he had been asked, would have advised against it because "the Nobel Prize confers on an individual an authority which in economics no man ought to possess... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally". I like that quote because it nicely encapsulates the difference in the fields of hard science and economics and the different effects of this kind of prize.

At the moment the techniques available and the predictive power puts it far down the spectruum that has the hard sciences on one side and pseudoscience on the other with the soft/social sciences in the middle.

This is exactly correct. Just because we don't have the means to do the kinds of experiments we want, doesn't mean we get to change the definition of proof. And if you do, you certainly shouldn't call it science. If there was no good way to do a falsifiable experiment in physics we wouldn't say "oh we have a lot of data though, so i guess we should just look at the correlations and assume causation in this case". The question would simply remain open, perhaps indefinitely. This is the most frustrating thing about discussing economics with anyone: if you're truly honest, you should admit that you can pluck examples in history to prove just about anything. Each side will say "oh that's not comparable because ____". And you know what, they're right! Since no two situations are the same, we rely on our "gut" to tell us what variables, despite being different, "didn't really influence or matter". The idea that you can for example draw any conclusions about economic policy from the 50s, a ridiculously unique time where all the production of the world except the US was more or less destroyed, is absurd. The idea that you can look at the effect of ONE policy in Germany, a country of different size, culture, laws, and other policies, and say the same would happen here is equally crazy. It's data sure, but not particularly useful data if you are honest about the science of it. Those techniques would get you laughed out of any other scientific field.

> At this point I have to ask, how is your view of economics different from theology? What is the point of such a useless field of study?

My view (I am not the op), is that yes, most people who believe in macro economics principles are closer to theologists than scientists. It is indeed quite possibly a useless field of study, given that there are huge disagreements and it doesn't even matter because a politician will usually do something completely based on the next election or special interests anyways, so even if we did know for sure it wouldn't matter. ( a funny article by mr Krugman himself on this: http://www.nytimes.com/2000/06/07/opinion/reckonings-a-rent-... )

Now, there are alternative forms of establishing knowledge other than science (for example there are no experiments in math, and math isnt science), and you can argue that the position "I don't know" can be a very wise one and an economic policy all in itself. But the idea that "doing x will for sure do y" is silly, ESPECIALLY since a timeframe is rarely ever attached to it.

Except we have evidence of what happens when a much larger fraction of the economy does what Iceland did. It was called the Great Depression. Small economies can borrow from abroad without destabilizing everything. Unless you are willing to directly take on the analogy of the Great Depression the 'Iceland for everyone!' argument is dead in the water.

Why bother with Iceland when we can be following the economic policies of Beverly Hills?

Iceland was in a position to hang out the creditors, because 1) they were all foreign; and 2) they didn't have an immediate, present need to tap the capital markets.

While not being in precisely the same situation as Iceland, Ireland probably could have done something similar. Greece cannot, because they continue to need to borrow immediately.

I think the (correct) point of the original article was that listening to and following the advice of your creditors is typically the best thing for them, but not for you.

Anyway, I think salaries in many Wall Street jobs have been declining. And many of the banks that took TARP money paid it back with interest. Those that haven't, should be forced to at some point. Also, I think some of that money went to Detroit.

Of course everyone else could do the same thing. But would it have the same effect? I don't know.

Edit: That said, my intuition is that default + devaluation is actually the right way to go for many countries. But the effects will be much more complex if many countries do it, and if bigger countries do.

Said no engineer ever.

But the point was that these were private bank debts, not debts of either the national bank or the state. Once they the state took on those debts, yes, there were obligations.

The truth is actually the opposite: "rich" Euro countries are de facto forced to carry their weaker partners, one way or the other, to stop their own currency from sinking. The whole austerity-vs-default debate is just a game of chicken that Irish/Greek/Italian/etc elites were not good at playing (or did not want to play, in order to safeguard some specific economic interests).

Do you work at one? I work at a Canadian bank and the culture has shifted enormously here, but I'm entirely unfamiliar with how things are in the United States.

They also handle and manage capital for everyone from consumers, businesses, enterprise to other banks. And capital is every bit a tangible resource as something like electricity is.

I personally was outside the Northern Rock branch in the UK when it went under. Over 3/4 of the people in line were scared and worried senior citizens. People forget that financial institutions affect EVERYONE.

I wasn't talking about legality. Clearly what Iceland did was legal. It's still theft if you can pay the money back and you don't.

>Are there any types of debt in the US in which a default is considered considered illegal?

As a matter of fact, yes. Student loans are not dischargeable in bankruptcy.

>Among the many differences between a loan and a theft, is that the transaction is entered into by the choice of both parties. Whether it is a true free choice is another question, as is the issue of fraud in creation or discharge of the obligation.

Which all amounts to rationalization in this case. This isn't a case of someone being forced to take on debt by a loan shark.

So Greece was able to spend way beyond what they produced.

For a while.

There was never any way this could go on indefinitely, spending had to come down at some point, because you can't spend more than you take in in the long run - so called "austerity". And that's even without taking into account that you usually have to pay back debts.

The fact that this hits the little people rather than the tax-avoiders at the top is an internal Greek problem.

Although they should not have been admitted to the Euro, leaving it now would not improve things: their debt is valued in Euro, so if they return to the Drachma and then devalue their currency, their debt goes up even more!

Of course, they should never have been admitted to Euro, and it turns out that the so-called Euro crisis (which is yet another banking crisis) was precipitated by Goldman Sachs letting slip that there was "something fishy" with Greece.

How did Goldman Sachs know this? They were the ones who had cooked the books for the Greek government in order to gain entry to the Euro.

IMHO, the EU should seize Goldman Sachs assets in order to pay for the Greek bailouts.

Economy of Greece - http://en.wikipedia.org/wiki/Economy_of_Greece

Which is not totally surprising since it's this imbalance of trade that resulted in them running up their massive 'credit card' bill in the first place.