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  • irishtimes.com - Posted: December 19, 2008 @ 9:33 pm

    You think it’s all over?

    Harry McGee

    If you read only one column this weekend, read Paul Krugman’s column about the lessons from the Bernard Madoff fraud in Friday’s  New York Times. (Here’s the link)

    Madoff was a bastion of the New York financial world. Krugman notes that he a “brilliant investor (or so almost everyone thought), philanthropist, pillar of the community”.

    The op-ed columnist then lists a hitherto undiscovered trait. He was also a phoney.

    And a massive one. His huge investment scheme, with a worth of a reported $50 billion, was a Ponzi scheme; in other words an elaborate and outrageous pyramid scheme, the Taj Mahal of houses of cards and frauds. It was a little the smooth-talking Irish financial adviser Breifne O’Brien seemed to be doing. But on a vast scale. The extent of the fraud… Ireland’s annual income for 2009, and then some.

    Warren Buffett once said that it is only when the tide goes out that you realise who is exposed as naked and who is not.

    And the annihilation of the world financial markets seems to have exposed more brutally exposed flesh among the financial elite than a lifetime of Lucien Freud portraits.

    Sure what Madoff did was crooked, but Krugman observes acidly that all he did was skip a few steps. Granted, he is being slightly facetious. But the point is the same.  The net take was almost the same for those geniuses who worked on Wall Street as it was for Maddoff.  The fraudster simply dispensed with the pretence of fooling himself that the investment was actually being really earned.

    The Byzantine make-up of the money markets – with its ultra-complicated derivatives and derivatives backing derivatives – is as easy to understand and explain as the Black Hole and quantum physice.

    But while the models got complicated the purpose and motivation were both very simple concepts indeed.

    The purpose was to cover up the tracks. The game became so elaborate and so elongated and so multi-faceted that too few realised that the original track led nowhere.

    And the motivation? Greed, pure and simple. Not just that of the Masters of the Universe. The virus spread much wider than that, affected us all. We ignored the lessons of history, of all the previous bubbles. We thought that this time that share prices would rise into the infinite futures, that economies would continue to expand, that this cycle would never really come to – what’s the phrase – yes, a shuddering halt.

    Krugman is worth quoting a little here:

    “We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.

    But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

    At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way…

    Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

    Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.”

    Brian Cowen and his Government took a battering when they unveiled the economic recovery plan this week. Cowen has had a torrid first six months as Taoiseach. He has been a very unlucky General. Bertie Ahern dealt him the worst possible hand as he himself finally took lead of the table. And with that lousy hand, Cowen has gone ‘all in’ in the forlorn hope that somehow it can keep them there.

    Some of it is of his own doing. He has been indecisive. That has not been surprising to me. A lot of people over the years have confused his style with his record. His style may be rambunctious but his decisions have always been ultra-conservative and have tended to come after a lot of humming and hawing.

    He gave us 100 pages on Thursday. But all he needed to give was three words: public pay cuts.

    But the Government must be given some credit for trying and for a first effort at creative and imaginative thinking. My impression is that Cowen has wanted to be a thoughtful and quietly revolutionary Taoiseach in the mould of Lemass but has been so mired in crisis management that he’s found it impossible to do so. He wanted to become Taoiseach maybe at the end of 2009 but that was not to be. Already, niggling questions are being asked will he last until the end of the year?

    And the opposition needn’t bay so loudly either. Look at their preposterous proposals on stamp duty that would have made the property bubble splat even more spectacularly. In the run-up to the 2007 election, all the main parties conformed and toed the line in their own way on low taxes and on property incentives. Everybody parrotted on about 4 per cent growth and possible soft landings. They either didn’t see the tidal wave. Or refused to recognise it as a tidal wave.

    There were a couple of dissenting voices out there saying that it was all overheating dangerously but nobody was brave enough to shout stop.

    And we, the people, were complicit.too. We are not passive. We must take the share of the blame for believing that our earnings would increase exponentially, that our houses would continue to rise in value, that the huge credit card and other debts that we were building up could somehow be magicked away by our vast earning potential sometime in the future. All of our calculations and wisdom was all predicated not on tangible things or products or service. But on the intangibles like confidence, hope, optimism and day-dreaming.

    Sure the Government doesn’t need to shoulder all of the blame. A lot of what is happening was indeed outside its control But now, politically, the Government needs to be decisive and to dole out the tough medicine. That means a couple of hard and unpopular decisions. Cowen says he’s not afraid of doing that. So let’s see him do it.

    But that in itself will not be enough.

    Freezing public pay will save half a billion euro. Even cutting public sector pay will not solve the problem.

    Put simply, Irish society is not as wealthy or as rich as we all believe it to be. To use the immortal words of CJH, we are living beyond our means.

    The implications are obvious. We will have to cut our cloth to suit our measure. And nobody quite knows yet how awful and painful and bracing that is going to be.

    Fógra: Senator Joe O’Toole has a new podcast reflecting on his political week which you can access here. We will make a tecchie geek out of him yet!

    • Patrick Finn says:

      Problems in Ireland 2008.
      1. Inability of media to say what they believe to be true – defamation laws way too much in favour of alleged wrongdoer – suits govt and wealthy
      2. Those with access to other people’s money use it to their own advantage e.g. bank directors, solicitors, the government, the public sector.
      3. The government controls the people through the govt’s sidekick, the public sector. The problem is that both are primarily interested in themselves, one supports the other and vice versa.
      4. Those who really make money for the country, eg, tourism are left to themselves to work it out.
      5. All govt depts are forever issuing threats to the private sector but none to themselves,e.g. pay your rates now or be fined €10,000 and even go to jail for 2 years
      6. Therefore the pvt sector needs to be involved in the public sector just as vice versa.
      7. Benchmarking was used on the way up and so it must be used on the way down.
      8. People with criminal convictions should not be given welfare to buy guns/drugs ever – forget about jail!
      9. The notion that all old people are poor is nonsense – fabulous houses, pensions, investments, etc.
      10. Foreign residency needs to go now – pay taxes here or stay away.
      11. People want fairness in all things – being poor is not the fundamental issue, fairness is.
      12. Real work needs to be rewarded.
      13. Risk-taking likewise.
      14. Need 10% reduction in public sector wages and pensions, welfare and general pensions, etc., plus 10% reduction in numbers at no cost to quality of service
      15. Sick leave needs to be abolished now.
      16. All sorts of benefits accrued over the last 100 years in Public Sector need to go now.
      17. All this regardless of strikes, etc. remember Reagan and air traffic controllers’ strike.
      18. Private Sector wages need to be adjusted upwards in line with Public Sector by govt subsidy.
      19. Same for all private sector pensions, sick leave etc.
      20. Otherwise civil unrest is a real threat.
      21. Moral degeneracy must end.
      22. Politicians pay in line with European norms
      23. Reduce no. of TDs and abolish Senate
      24. Reduce no. of councillors and stop paying them.
      25. Need to pay real people for real work, eg, cleaning a dirty toilet after a guest has dirtied it.
      26. All Capital Gains Tax to be paid on an annual basis on assumed profits regardless of whether sold or not, to avoid the massive accumulation of assets by the few at the expense of the many.
      27. Public works to be carried out at min cost incl broadband
      28. Referendums to be held every 3 months to prevent any constitutional issues.
      29. All medical personnel to be held not liable for any damage – all incompetents to be fired.
      30. Only make a new law if 90% of old laws enforced
      31. Gardaí to be armed whether they like it or not
      32. Gambling to be taxed at 20% on all
      33. Increase tax on alcohol
      34. Unused people in Public Sector to be redeployed in Private Sector at 50% subsidy
      35. All unemployed people to be checked once a month to check their validity
      36. Casinos to be legalised at 20% tax
      37. Same for sex industry
      38. People objecting to a project which has passed all planning to pay for policing
      39. Private pensions need to be increased to Public Sector norm since it is Private Sector that is paying
      40. Courts need to be overhauled so that community service orders, fines, etc., used more and all judges singing off same hymn-sheet
      41. Rewards for good behaviour need to be increased rather than fines, etc.
      42. Green energy needs to be encouraged
      43. Voluntary effort and community work needs to be rewarded
      44. Govt cars with cops need to go.
      45. Anyone in public sector traveling or using any but most basic travel, etc., needs to be fired
      46. Need to get people out of public sector voluntarily by making conditions more difficult in it and easier in private sector.
      47. Need to note that 95% people compliant in all things BUT no reward
      48. All govt depts need to be coordinated – hymnsheet etc
      49. Every building and house needs to be checked to see what is going on.
      50. All derelict sites taken over
      51. All planning to be complied with including retrospective
      52. ESB etc prices down and wages etc
      53. Corrupt people elect corrupt politicians
      54. Get rid of permanency in PS and delete bottom 10 % every year.

      Now that is a strategic plan!

    • Ewan Duffy says:

      About as valid as the Government plan and contains as many contradictions e.g. 14 and 18 are contradictory.
      In addition, enforcing a lot of the currently unenforced issues – e.g. checking dole recipients monthly will require public servants at a cost.

    • Tom Ennis says:

      The funniest thing about the staggeringly incoherent list is his own comment at the end. Either Mr Finn is delusional or it’s a wind-up.
      My personal favourite is No. 29, no personal liability for medical employees yet all incompetence to be punished by dismissal – surely firing somebody for an instance of incompetence is holding them liable?
      Patrick, I have to ask, are you taxi-driver? Seems like I’ve heard this nonsense a lot while coming home from town

    • Patrick Finn says:

      Ewan and Tom,
      Thank you for your comments. Better to be insulted than ignored. I am neither delusional nor a taxi driver and furthermore am still waiting for your strategy!
      The list was composed quickly and so was not detailed.

      No 29 refers to the constant litigation in our courts in relation to medical mishaps. All money given to litigants(deserved or otherwise) means less money for the health service.
      Better to have a no fault compensation scheme as in some other countries, where for example the parents of children born with significant medical problems are given a significant amount of money/resources regardless of whether there was medical negligence or not, the idea being that it does not matter to the child – he or she still needs lots of care, regardless of whether the condition was genetic or due to medical incompetence.
      This also avoids the enormous legal costs and delays in the present system.

      Having the ability to sack incompetent personnel, again without the long laborious, time consuming court process is important as many recent cases have demonstrated.

      This approach would also reduce the necessity for medical personnel to practice defensive medicine which is a major contributor to the escalating cost of health care and private health insurance.

      14 and 18 are not contradictory. Reducing public sector pay by 10% and subsidizing private sector pay, in areas where that subsidy is needed, critically in certain parts of the traded sector, makes perfect economic sense.

      In relation to dole recipients, one has to wonder why we still had in excess of 100,000 people unemployed in Ireland, at the height of the economic boom while several times that number came into this country and found work. Employing some, even many people to check on the status of the unemployed is an excellent use of resources, though not necessarily monthly!

      Thanks again for your comments – please feel free to insult me again!


    • Tom Ennis says:

      Completed exceptionally quickly by the looks of things.
      Perhaps you’re right about my failure to offer a strategy. In place of my own (also unoriginal) musings could you instead elaborate on your strategy to eliminate moral degeneracy?

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