In keeping with the tradition of St. Patrick’s Day, I turn my attention to Ireland today. It is striking to see how much Ireland’s international financial standing has been bolstered by the change of party in the recent election. The vultures are no longer circling waiting for the Emerald Isle to tip over and the emeralds to come loose. Rather, the consensus is that, absent any large mistakes ahead, Ireland is inexorably on the comeback trail.
It is not really that one party is that much better than another. The problem in Ireland was that the previous ruling party had a political commitment to save the banks. The new ruling coalition has no such agenda and can easily let all the banks in the country fail, if it comes to that, setting up a replacement bank that could conduct the country’s financial transactions.
There is a lesson in this for the United States — not that the United States needs to replace the Republicans and Democrats with other political parties that aren’t tainted with the Wall Street Bailout, though that might help, but that Congress needs to take action to renounce any possibility of a save-the-banks strategy. This could include reinstating the Glass-Steagall Act, closing some loopholes in deposit insurance, and requiring greater transparency in derivatives trading and in banks’ dealings with investment funds. These are steps that would largely prevent the current web of secret arrangements between banks and speculators that allow the risk of speculation to be transferred to the banking system.
Such a move might sound unlikely at a time when Republicans are pushing to create new loopholes for Wall Street. Yet shortly, they may have no choice but to go along with it. The government’s implied guarantees of the financial system are as good as liabilities as far as the international financial community is concerned, so they make the country vulnerable to the same kind of financial squeeze that Ireland faced under its previous administration. And just as Ireland put itself on solid financial ground again by asserting its willingness to cut the banks loose, the United States may soon be forced to do the same thing.