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Debt which cannot be paid will not be paid, whatever the money was used to pay for.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 09:07:52 AM EST
[ Parent ]
Yes, but in a bankruptcy all creditors will suffer. Including private persons in Ireland.
by IM on Fri Feb 4th, 2011 at 09:52:08 AM EST
[ Parent ]
Private persons in Ireland are already suffering because of the conditionalities of a bailout designed to give the foreign bondholders time to offload their bonds on the ECB without improving the solvency of Ireland.

Bankruptcy would be a better deal.

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman

by Migeru (migeru at eurotrib dot com) on Fri Feb 4th, 2011 at 09:55:49 AM EST
[ Parent ]
The Irish mess started when foreign banks and other financial institutions lent money to Irish banks who turned around and created a real estate bubble.  If anyone in that chain had done due diligence they would have KNOWN they were sending good money into a black hole.  

Simply put: there's a case to be made the Irish and foreign financial institutions are guilty of malfeasance.  In which case they can go whistle for their money.  Illegal acts do not constitute a binding contract.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Feb 4th, 2011 at 01:37:29 PM EST
[ Parent ]
Illegal act? So loaning money to the irish state in 2003 or 2005 or even 2009 was illegal exactly why?

Because the Fiana Fail dictatorship was not the legal government? Because everybody had to know how exactly the "Celtic Tiger" would crash?

Nationalistic nonsense. Next up: How the ECB caused the Famine.

by IM on Fri Feb 4th, 2011 at 02:11:12 PM EST
[ Parent ]
Nationalistic nonsense

You might want to note that most here are not irish. So it seems wrong to claim that nonsense on behalf of the irish is nationalistic.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Feb 4th, 2011 at 03:00:47 PM EST
[ Parent ]
The last Irish in my family tree, to my knowledge, was a great-great grandmother from Ulster who arrived in the mid 19th century. The Scots-Irish-Welsh on my father's side arrived earlier.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 4th, 2011 at 11:24:58 PM EST
[ Parent ]
Two things happening.

The first was malfeasance by not doing due diligence by the Irish banks and the foreign financial institutions who lent money to the Irish banks to fund the real estate bubble.

The second was the improper action by entities in the Irish government who bailed-out the Irish banks and loaning foreign institutions.  Proper financial regulation and oversight would have would never allowed the Irish banks to get into this mess in the first place; proper financial regulation and oversight post-mess would have let the banks fail with the Irish government "picking-up the pieces" as Migeru has already outlined elsewhere in this discussion.

Debt is paid off by the cash stream generated from the productive (goods and services) assets the debt was used to purchase XOR the cash stream generated by a vibrant economy and then redirected to debt service.  Consumer real estate purchase is a perfect example of the latter.  (At least as long as the house, whatever, is held by a consumer.  I note purchase for rental is different.)  Consumer real estate does not generate cash but, rather, is a net drain of cash when viewed from the total amount of discretionary consumer income.  This means:

As the cash stream generated by the Real Economy is diverted to debt service the total amount of consumer spending MUST fall by that amount.  This, in turn, lowers economic activity (eventually) in exactly the place where the cash comes from to service the debt: the "Real Economy" where people create wealth by producing goods and services and get cash for so doing.

The result of this has been analyzed (no link, for which I apologize) to conclude banks and other financial institutions withdraw, roughly, 7 pounds for every pound of debt issued.  No economy in the world, including the global economy, can withstand that rate of predation.  Eventually marginal borrowers will be forced into non-performance initiating a positive feedback loop in the negative direction and the bubble bursts.  

No one 'round here, I should think, is saying debt is necessarily evil.  Debt assumption for increasing production generating an Internal Rate of Return (IRR) (cash) capable of debt service is a vital part of a non-barter economy.  Debt assumption that doesn't generate an IRR and simultaneously reduces the ability of the micro-economy to service that debt is stupid because it WILL, eventually, crash the economy.  

As a former banker, I can tell you there are known methods and procedures for determining the credit-worthiness of borrowers.  Running those is what Due Diligence is.  Since 2004 I have been warning the ever-increasing amount of money flowing into real estate was going to crash the global economy because I ran those methods and procedures.  The various financial institutions did NOT go through that process and, IMHO, should be held accountable.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Feb 4th, 2011 at 03:14:21 PM EST
[ Parent ]
IM:
How the ECB caused the Famine.

I thought that famine was caused by the ethanol subsidies to US ethanol refiners which has driven up the price of corn.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 4th, 2011 at 11:22:06 PM EST
[ Parent ]
No, by the CRA and Fannie Mae.
by IM on Sat Feb 5th, 2011 at 06:28:37 AM EST
[ Parent ]
Oh, dear, you now subscribe to the Republican theory that the cause of the crisis was Fannie and Freddie forcing the private banks to give mortgages to n****rs?

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Feb 5th, 2011 at 06:32:03 AM EST
[ Parent ]
That was a obvious joke. I am a regular Krugman reader too.
by IM on Sat Feb 5th, 2011 at 07:44:14 AM EST
[ Parent ]

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