The marketplace functions by rewarding individual success, and in theory only, by punishing individual failure. In Ireland and elsewhere this year, collective society will pay a high price for the mistakes of some.
Ireland’s problem, as described in earlier posts, is an unmanageable debt burden. While government debt is relatively low for now, private sector debt (mortgages, car loans, credit card debt, etc.) is somewhere north of 180% of GDP. This gives Ireland the highest level of personal indebtedness in the world. In an economy contracting at an alarming pace, we have no chance of being able to pay it all back.
Debt default will visit Ireland in a big way. But the nature of that default will not reflect the current ownership of the debt. Instead of allowing private debtors to individually default as their personal finances wane, the debt will be assumed by the state and repayed/defaulted against collectively. This will happen through state nationalization of the banks, through which all private credit is extended.
Once the state owns the banks, it will be on the hook for the losses on all the private loans, in addition to its own public debt. In this way, the public debt that funded schools and postmen will be merged with loans for BTL apartments and pie-in-the-sky skyscraper developments.
Every taxpayer in Ireland, whether they directly participated in the housing bubble or not, will soon be on the hook for the losses of those who played a fool’s game and lost.
