Time to open up a new category of posts: international perspectives on Ireland by Seriously Smart People.
First up is Nobel Prize winner, Joe Stiglitz who was in Ireland last year. He gave an interview to the Irish Times in which he annoyed to government by not being entirely enthusiastic about the NAMA etc. He addressed three issues that we will return to repeatedly in this blog: competitiveness; the deficit; and NAMA.
On competitiveness he noted that we had to get our costs down so that we cand grow exports to get out of the recession. If we had out own currency, we would be able to devalue. This would reduce the prices of our exports in terms of other currencies and thus boost exports. This achievement would come at the cost of boosting inflation by requiring us to pay more for our imports. Thus living standards would fall as prices rose. Stiglitz advocates reducing wages (and other costs) directly so that the price of our exports can fall. We will look at this in detail soon.
On the deficit, Stiglitz also noted that there was a need to get the public finances under control. But he warned that there was a need to avoid what he called “deficit fetishism” i.e. avoid too large an adjustment which will only make the situation worse. It is a balancing act. I discussed this issue more fully in a previous post.
Finally, Stiglitz commented that NAMA and other similar plans can be too generous to the Banks. He advocated adhering to the “rules of capitalism” which says that if a company screws up badly then the shareholder should — and usually do — loose their investment. NAMA, however, is deliberately structured to preserve some degree of shareholder value via a deliberate over-payment for the bad loans . Evidence of this can be seen from the fact that the share price rose immediately after the details of NAMA were announced — of course they did — we had just given the shareholders a pile of free money. Essentially Stiglitz advocated some version of NAMA that would pay less for the bad loans implying that shareholders would loose their investment and requiring that bond holders would also take a hit. Only depositors should be guaranteed to suffer no loss. This is a huge issue and I will devote several posts to it next week.
