Are the Irish Electorate to Blame For the Eurozone Crisis?

Lorenzo Bini Smaghi (executive board member of the ECB) published an article in the Financial Times that blames the Irish taxpayer for the banking crisis. Irish taxpayers voted for successive governments that supported minimal regulation of the financial system and therefore they should not complain about the cost of bailing out the banks. It gives a very important insight into the thinking of the ECB  and their understanding of the economic crisis. It is a must read. The article is flawed in so many ways it is hard to know where to begin. But, the erroneous assumption in the first paragraph sets the tone for the rest of the article. So, illustrating the falsity of this assumption seems an appropriate way to highlight the fallacy of the argument

“If taxpayers have the right to share in decision making, they must also accept the consequences”

The Irish taxpayer did not share in the decision making of private banking and regulation of finance markets. Technically, the central bank and the regulator are independent agencies that are free from political influence. If we are to follow through on this argument then the ECB is directly accountable to European citizens and operates according to what citizens want.

The Irish electorate was bought with low taxes. This is true. Every election from 1997 was in effect a tax auction – who could offer the lowest. The electorate are responsible for voting in a right of centre liberal market government that espoused the low tax, minimal regulation model (as did the media and a significant section of academia).

But, to jump from this valid statement to the conclusion that the Irish electorate are responsible (as taxpayers) for the specific decisions that took place in private firms (banks as buyers and sellers of money) in a private market (that is so complex that most people know little or nothing about it) that was ‘regulated’ by unaccountable bureaucrats is not only logically incorrect but ridiculous.

The whole argument is based on a completely abstract idea of a ‘perfectly informed rational voter’. The voter has an incentive to vote for more or less regulation given a certain set of conditions. The conditions enabled a fully informed rational vote to support flexible financial regulation. That is, the voter knew precisely that their vote would contribute to a risky financial environment that they may have to pay for in future years.  Nonsense. I would be hugely surprised if 1 percent of the electorate voted for their party of preference on the basis that an unregulated finance market benefits them, let alone the risk involved in having a lax financial regulatory regime.

Poorly managed banks (as firms) that go out of business should be allowed to fail. This is what a market economy would look like. However, we don’t live in a market economy. We live in a socio-economic system called capitalism. You cannot model this on the basis of perfectly informed rational consumers or voters because it is premised on structural relationships that involve power.

The conclusion that transnational supervision across the Euro area is the most prudential way forward is correct. The ECB and all member states in the Euro area should have recognised this 12 years ago. They did not. To engage in a post hoc analysis and argue “responsibility was national but it should have been European, but given it was national – you have to pay the bill” is just lazy thinking. To then argue “don’t complain” is just provocative.

The people are not to blame nor are they accountable for the reckless behaviour of private banks and the flawed design of the Eurozone. If this is the lazy analysis informing ECB policy on who is responsible for the crisis and how to get out if it (i.e. blame the people not the finance system) we should be all very very worried.

16 responses to “Are the Irish Electorate to Blame For the Eurozone Crisis?

  1. Pingback: Irish Left Review · Are the Irish Electorate to Blame For the Eurozone Crisis? | Aidan Regan

  2. Congratulations! What you’ve managed to do there is introduce moral hazard for the whole electorate, thereby undermining the fundamental workings of representative democracy.

    The electorate in a modern democracy has, as you say, little chance of understanding the ins and outs of everything their government is supposed to be doing. How they find out whether the government they elected is competent, then, is clearly not simply by observation. Instead, the process of democratic accountability rests on the *outcome* for the electorate of the government’s actions. Bad government produces bad outcomes for the electorate, which leads the electorate to choose a different government.

    But why should the electorate ever vote to hold the government to account if there are also no negative consequences for the electorate from electing an incompetent government?

  3. @ IBIS

    That would be the case if that was my argument. But, it is not. The point is that it is ridiculous to logically associate the vote of the electorate for the decisions that take place in the board room of a private bank.

    To make an analogy – blaming the electorate for the reckless behaviour of private market actors because they voted for a government that supports lax regulation is equivalent to blaming the US electorate for the 9/11 terrorist attacks because of their elected governments foreign policy.

  4. And that would also be entirely correct. Either democratic electorates are responsible for the (non-criminal) actions of a duly elected government, or democracy is meaningless.

    I’m afraid that *is* your argument.

    • If you post non-anonomously we can engage in a discussion on this. Ultimately it will boil down to an ontological difference about to what extent an action in one space is accountable for an action in another. But, if you think those who voted in an election (whether for FF or not) are accountable for the decisions of actors in a private bank then I suppose we the electorate (and by default of your argument – the state) are responsible for pretty much everything – inlcuding the decisions that take place in Google, Microsoft and every other company that occurs in the economy – it is nonsensical really (as is the idea that all US citizens are responsible for the 9/11 terrorist attacks).

  5. Well, again, if the electorate are not ultimately responsible for the (non-criminal) actions undertaken by parties private or public within a sovereign state, who exactly is supposed to be responsible?

    I’m not arguing against apportionment of responsibility within the state, but when it comes to collective responsibility vis-à-vis the outside world, where else should we look for Irish responsibility but to the people of Ireland, from whom (under God) all Irish sovereignty derives?

    Or is there simply no such responsibility?

    (In respect of anonymity, ibis is my username, I’m available for multilateral discussion there.)

  6. Have you actually read the article?

    It is not about vague and general notions of responsibility but the specific and particular question as to wether the Irish electorate are directly responsible for the reckless behaviour of private banks.

    • I have of course read the article. The argument that the Irish electorate is ultimately responsible for bank regulation in Ireland seems watertight to me. It’s not necessary for the Irish electorate to understand bank regulation in order to be responsible for it, any more than it’s necessary for them to understand the technicalities of nitrate entry to groundwater. The system works because if the Irish electorate elects a government that does not competently regulate these technical issues, the Irish electorate has to live with the consequences.

      Negative consequences for the electorate result in a change of government – not because the electorate suddenly understands the technical details of what the government got wrong, but because they find the consequences of the government’s actions unpleasant.

      You cannot remove that negative feedback from the system without vitiating the whole notion of democratic accountability, precisely because the average member of the electorate doesn’t comprehend the issues on a day to day basis. The only feedback for the electorate is therefore the unpleasant consequences of bad decisions, the only feedback for government is the displeasure of the electorate – remove the unpleasant consequences of bad decisions from the electorate, and the electorate has no reason to want to prevent government from making bad decisions.

  7. Irish banks borrow over €150bn at zero interest rates from European banks and pump this into the Irish economy. The managers get miilions in annual bonuses. These failed businesses go bust. The taxpayer bails them out. The state becomes insolvent. Yes, it is the people that are to blame not the banks.

    The only moral hazard in the Irish economy is the ability of incompetent bank managers to get rich, wreck the economy and give the bill to the taxpayer.

    On a side note and as stated in my article. The Irish central bank and the regulator are independent agencies that are technically free from government intervention. The whole purpose of establishing this system was to disconnect the state from the regulation of finance markets. Monetary policy is not within the control of government. The people have ZERO influence over monetary policy.

    • Irish banks borrow over €150bn at zero interest rates from European banks and pump this into the Irish economy. The managers get miilions in annual bonuses. These failed businesses go bust. The taxpayer bails them out. The state becomes insolvent. Yes, it is the people that are to blame not the banks.

      No, the banks are to blame, but the Irish electorate is ultimately responsible. Unless the actions of the banks were criminal, then they are allowed by law, and who elects the legislature? The banks are regulated by the Irish regulator, and the regulator may be “independent” of government, but the regulator’s powers are set by government, the regulator is established by government, and if there is genuinely no one the regulator is accountable to for his regulation, then that’s a failing of Irish legislation…which takes me back to the question of who elects the Irish legislature.

      On a side note, I’d be interested to see your evidence for the Irish banks having borrowed “€150bn at zero interest rates from European banks” – I won’t hold you to the “zero interest rate”, but if you’re relying on the Basel figures commonly used in the media for the source of Irish bank borrowings during the boom, may I respectfully point out that those figures are not usable for that purpose, because they cover 83 Irish-based MFIs rather than the 6 banks we’re bailing out. I would direct your attention instead to the aggregate balance sheets of the covered institutions as published by the Central Bank, available here.

  8. I would direct your attention to the interbank lending rates outlined by the govenor the central bank, Patrick Honohon here:

    Click to access Conf28-10-2010Honohan.pdf

    Interbank lending rates were practically zero post 2000. This is common knowledge. To think or argue otherwise is the realm of conspiracy.

    • Sure – but that doesn’t demonstrate that €150bn was “borrowed from European banks”. I did say the interest rate wasn’t of interest to me.

  9. I agree with ibis.It is telling that you quote this sentence as the basis of Bini Smaghis’ argument..

    “If taxpayers have the right to share in decision making, they must also accept the consequences”

    When in fact the bankers argument was stated in the sentence before that..

    “The principle of ‘no taxation without representation’ should work both ways.”

    This is ,unfortunately for Ireland and your argument, true.

  10. This letter is worth reproducing in full as it hits the most important nail on the head: “regulatory systems are separate from finance ministry controls and thus outside the remit of the democratically elected”.

    Madam, – Reading Lorenzo Bini Smaghi (Breaking News, April 13th) leaves me baffled and wondering if there is some ulterior motive afoot. The tenor of his remarks is arrogant and their content inaccurate, particularly the comment, “If taxpayers have the right to share in decision-making, they must also accept the consequences”.

    As a director of the ECB he is fully aware that within the EU, the regulatory systems are separate from finance ministry controls, thus are outside the remit of the democratically elected. . Furthermore, neither Irish taxpayers nor politicians set the lending criteria in Anglo or other banks. Not only were the taxpayers absent from the decision-making process, how were they to know, or even suspect what was going on?

    Every year the globally recognised auditors of those banks signed off – without qualification – on financial statements and balance sheets which were then reviewed by rating agencies and repeatedly affirmed with quality ratings; even stockbrokers generally gave bullish comments.

    At a macro level there were clear indications of property bubbles in Spain and Ireland, yet the ECB, of which Dr Lorenzo Bini Smaghi is a key director, did nothing. The ECB did not discourage foreign banks from over-lending to Irish banks, nor did it increase interest rates, a simple means of controlling the growth in speculative lending. The good doctor is in no position to point an accusatory finger. – Yours, etc,


    Parknasilla, Co Kerry.

  11. @aidan
    “This letter is worth reproducing in full as it hits the most important nail on the head: “regulatory systems are separate from finance ministry controls and thus outside the remit of the democratically elected”.

    Not according to the Dept. of Finance website.The Financial Services Division…

    “This Division deals with policy and legislation on the regulation of the financial services sector and the stability of the financial system, both prudential and consumer aspects, and international co-operation in related areas; the development of EU policy and legislation for the financial services sector, including the transposition of EU directives; international financial services; and relations with the Central Bank and financial Services Authority of Ireland”.

  12. An interesting discussion. Over the past few days I have been wondering about personal political responsibility in terms of where the country currently finds itself and your debate is informative and useful. My only contribution would be that at some time in our lives we all put our trust in specialists for the interpretation of technical and complex areas of knowledge. For example, ibis has surely relied on a medical practitioner at some point in his/her life for diagnosis and prescription. A medical error in that process can be deemed legally negligent if the practitioner offers sub-standard or non-standard service. The law does not argue that the sub-standard/non-standard service was in any way the responsibility of the patient. Equally sub-standard service to the state by politicians in complex policy areas cannot be justifiably attributed to the voter who has put their trust in those politicians’ competence at election. However, it does suggest that enabling the taking of malpractice suits against politicians should be part of the political reform process.

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