Tuesday, 23 November 2010

Funny Old world

Our esteemed Chancellor of the Exchequer has offered to lend the Irish Government upwards of £7 billion quid to help them get their banks out of their current financial fix. Nothing wrong with that in principle; most of us are related to someone Irish (e.g. my Grandmother) and one should help out friends and relatives in need (but get it in writing, just in case). Plus, of course, the UK and Irish economies are inextricably linked. What is troubling me is that this is another example of the money concerned not being being backed up by actual wealth but by confidence. And this confidence seems somewhat ephemeral.
The Irish financial crisis has been caused by the banks borrowing money on the financial markets which they have subsequently lent to property developers and the Government. The property market became saturated and collapsed, and the Government has been a tad profligate in its spending, so the banks' creditors are defaulting and thus the banks can't repay the financial markets. So the UK, as well as the IMF and the EU, are going to lend the Irish Government and the banks the money to keep them afloat. But the UK, IMF and EU will have to raise that money on the financial markets by borrowing it. So we're going to borrow money from the financial markets to lend to Irish banks and the Irish Government so that the financial markets don't lose confidence in the Irish banks' and the Irish Government's ability to repay the money they borrowed from the financial markets. The amount owed to the financial markets is thus doubled.
Errm...guess who eventually ends up having to pay back the loan(s)? Not the banks, anyway. It'll be the poor souls who fund the Government with money or actual wealth generated through their labour.

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