Sunday Business Post: The Insider – recovery without austerity.

We were delighted to be this weeks ‘Insider’ at the Sunday Business Post, we looked at the mortgage market statistics and the idea of recovery without austerity.

The truth is a hard thing to suppress. Last week, we had another stark revelation about the mortgage market after RTE reported that there are now e20 billion in home loans with some level of arrears. That represents about one in six loan accounts.

If we were to stack e20 billion in e2 euro coins on top of each other, it would reach 44,000 kilometres high. Turn that stack on its side and it would wrap around the entire Earth at the equator with enough room left over to bring you from Ireland to New York. We have hidden these figures well in a plethora of ways. Firstly, by ignoring the international norm that measures arrears from one month upwards. In Ireland, we only account for them after three full months of payments have been missed.This hides over 40,000 problem loans. Secondly, until recently we had no information about the number of restructurings.

Thirdly,we are unable to establish the degree to which banks are working with borrowers who sell at a loss – the evidence is anecdotal at best. This doesn’t mean that every mortgage where a payment is missed goes sour. Far from it. But it does show that we are fed on a diet of misleading statistics that simply wouldn’t wash in other well-run economies.

There are two fundamental causes of mortgage arrears: income shocks (job loss) and expenditure shocks (unexpected expenses that the person doesn’t have savings to cover). Now, let’s put these troublesome private household debts in the context of the sovereign debt crisis.

While Greece is likely to face an orderly, heavy restructuring (or default), no household is being treated the same way.The now inevitable European Central Bank intervention will not be aimed at households either – it will be aimed at sovereigns and continental banks.There was no ‘surprise’ reduction in loan servicing costs for your average household in the way that Ireland benefited from recently – and for which we should write twin ‘thank you’ cards to both Berlusconi and Papandreou for creating the impetus that brought it about.

Sovereign nations have the ability to run a deficit, borrow on the markets or be bailed out. Households, on the other hand, have fewer options. Public debt might be grabbing headlines, but excessive private debt is far more effective at breaking economies in the long run.

Modern Monetary Theory

If you were told that we could have economic recovery without austerity, would you be compelled to listen? What if I were to tell you that the actual solution doesn’t have to be anywhere as painful as we are making it?

Quite frankly, I would be sceptical. I certainly was when I sat down for coffee with economist Marshall Auerback at the Mont Clare Hotel last week, after he flew into Dublin to address the Foundation for the Economics of Stability’s conference on ‘Solving the debt crisis’. Auerback carries the message of modern monetary theory (MMT).

Over the last while, we have heard about Keynesian economics, classical economics and Austrian economics. The new arrival on the scene is MMT, an unusual mix of accountancy, economics and practical modern finance. The fundamental premise of MMT is that Governments who can create their own money should move away from monetary policy as a way of tempering demand, and focus on fiscal policy. That means using taxation rather than interest rates as the preferred tool for intervention.

The core belief is that we could reduce our deficit in the morning if the ECB decided to create money and give it to national central banks on a per-capita basis (meaning Germany wouldn’t have to ‘pay’ for everything), who, in turn, could use it to reduce sovereign debt. The markets would then believe that EU countries had a better financial future and start funding them again. Wouldn’t this increase inflation?

The classical definition of inflation is an increase in the money supply. But, argue MMT proponents, taxation can serve to take money out of an economy. With such massive spare capacity in the system (primarily due to high unemployment), inflation should not be an immediate problem – although inflation at some stage is a problem, irrespective of doctrine.

Auerback says that this shouldn’t even be called a ‘theory’ because it is based on the way the system works right now. Governments should not have to issue bonds. In fact, bonds are there to facilitate the financial system, as opposed to being inherently required. But there is a gap to bridge: a fiat currency can be controlled by using taxation to take money out of circulation after it is put in. This is not a million miles removed from some of the ways the gold standard worked, but without the money supply constraint.

Auerback’s take on the eurozone is that, in its current form, monetary union has failed, a belief echoed by other speakers at the conference.Where he differs from others, perhaps, is in believing that fiscal union, rather than an orderly dissolution of European monetary union, is the end game.

Karl Deeter is head of advice at

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