Can the US learn from Ireland?

It’s interesting to note that the Nobel Prizewinning economist, Paul Kugman, who, incidentally, has found the Obama administration wanting in its handling the economy crisis, has written a brief piece for the New York Times ( reprinted in today’s edition of The Guardian warning the US government that if it continues on its current course, it could well end up in a similar bind as the Irish government has.

 

How did Ireland get into its current bind? By being just like the US, only more so. Like Iceland, Ireland jumped with both feet into the brave new world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the world’s third-freest economy, behind only Hong Kong and Singapore.

One part of the Irish economy that became especially free was the banking sector, which used its freedom to finance a monstrous housing bubble. Ireland became in effect a cool, snake-free version of coastal Florida

 Then the bubble burst. The collapse of construction sent the economy into a tailspin, while plunging home prices left many owing more than their houses were worth. The result has been a rising tide of defaults and heavy losses for the banks. And the troubles of the banks are largely responsible for putting the Irish government in a policy straitjacket.

 

Krugman gives an excellent summary of the hoops that the Irish government have gone through since the “bubble burst” He acknowledges that the Obama administration is still free to make decisions that are no longer open to the Irish

 

… For now, the US isn’t confined by an Irish-type fiscal straitjacket: The financial markets still consider government debt safer than anything else. But we can’t assume that this will always be true. Unfortunately, we didn’t save for a rainy day: thanks to tax cuts and the war in Iraq, America came out of the “Bush boom” with a higher ratio of government debt to GDP than it had going in. And if we push that ratio another 30 or 40 points higher – not out of the question if economic policy is mishandled over the next few years – we might start facing our own problems with the bond market.

That’s one reason I’m so concerned about the Obama administration’s bank plan. If, as some of us fear, taxpayer funds end up providing windfalls to financial operators instead of fixing what needs to be fixed, we might not have the money to go back and do it right.

And the lesson of Ireland is that you really, really don’t want to put yourself in a position where you have to punish your economy in order to save your banks.

Anybody wishing to know more about Krugman’s latest thinking can read his always readable The Conscience of a Liberal blog which a permanent feature in The New York Times.

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