Monday, November 22, 2010

To stay in euro we need to learn how to tax and SAVE

I've been looking for a robust defense of the euro, or more specifically, our membership in the euro following our financial/economic meltdown. I've found two recent columns (here and here).

They're both reasonable if the following assumption is valid: governments can tax and save. I have serious doubts about that, especially Irish governments. Money just seems to burn a hole in the pockets of people in government, partly because the electorate expects that hole to be burned.

I'd like to believe that our Central Bank could have insisted that the banks take a bigger chunk of their profits and put it towards a "rainy day" fund as is/was (apparently) done in Spain. That's the same instinct, though. The shareholders might not have accepted investing in a bank that was compelled to keep the capital ratios above the accepted 12% norm.

Even had the Central Bank done that would that only have opened the door wider to let foreign competition in to undermine the banks? This doesn't excuse the behavior of Anglo-Irish or our regulators or the government, but we should at least acknowledge that everyone was in a new situation - a currency union with countries that were not cyclically in synch with ours.

To be honest, of the three main players the one I blame the most is the regulators. They should have been more forceful with both government and the banks. They should have realized that the old capital ratio rules were at least somewhat in doubt in once we joined the euro.

We need a broader, more robust set of measures by which we assess the strength of the banks. And we need to learn how to tax and save as opposed to tax and spend, at which we've proven ourselves exemplary.