THE BIG PICTURE: Ireland is effectively insolvent – the next crisis will be mass home mortgage default

I'll finish it tomorrow...

It will be much worse in a year here.

As ordinary people start to realise that this thing is not only happening, it is happening to them, we can see anxiety giving way to the first upwellings of an inchoate rage and despair that will transform Irish politics along the lines of the Tea Party in America. Within five years, both Civil War parties are likely to have been brushed aside by a hard right, anti-Europe, anti-Traveller party that, inconceivable as it now seems, will leave us nostalgic for the, usually, harmless buffoonery of Biffo, Inda, and their chums.

You have read enough articles by economists by now to know that it is customary at this stage for me to propose, in 30 words or fewer, a simple policy that will solve all our problems. Unfortunately, this is where I have to hold up my hands and confess that I have no solutions, simple or otherwise.

Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term.

From here on, for better or worse, we can only rely on the kindness of strangers.

So, did you?

a hell of a state to be in
they may have to place a hold on the banks making any repossessions ...

That article seems to contain an interesting blend of defeatism and self congratulation, but the analysis looks a little weak.

Particular weaknesses in my view would be:
1. He doesn't really justify why the other banks will cost at least as much as AIB, he just assumes that mortgages will drop to such a level as to make those other banks equally worthless.
2. He justifies much of his assumption about the falling mortgages on his valuation of the banks above, as it is the titanic cost of securing them that causes much of the disaster he predicts.
That's too circular.

He also assumes that certain economic laws will drive the events he predicts, but appears to believe that other laws will be suspended for no particular reason. This is most graphically demonstrated again by his assumptions regarding house values. He says that a house is worth what a bank is prepared to lend against it and refers to unavoidable effects thereof. But this is simply not true. Objects are worth what purchasers are prepared to pay for them, this is true at all times and in all places.

If funding via incumbent Irish banks has in the past driven prices some assumed objective worth (which seems to be held as axiomatic in that article), then it is true that those banks could run out of money and so potentially drive the value of property back down. But this objective value doesn't suddenly evaporate, if it was axiomatically true before, then it must remain true. So the effect should be that Irish banks would be supplanted by non Irish ones, or bought by them, as the difference between the current retail value of the houses and the medium term 'actual' value would make them simply too tempting an investment. Supply and demand applies to both the houses and the investment capital with which they are purchased, but Kelly has assumed - without argument - that lack of bank supply means the end of all supply irrespective of demand.

Furthermore, he assumes that an interest rate of 2% is the most that can be afforded (on grounds of predicted GDP growth and low inflation), and implies that 5% would be a likely actual rate for an ECB loan.

I'd agree that 5% would be a bit steep, but would also point out that Ireland is in a much better position to expect better terms than Greece. Basically, Ireland has already put painful austerity measures in place, that demonstrates good faith, which is something that the ECB certainly ought to be taking into account as it reduces their risk, and it is standard practice to offer lower rates for lower risk.

I'd also question whether inflation and growth can both remain as low as he predicts. The Irish approach to this crisis, given the non availability of currency devaluation, has been internal devaluation - ie, pay cuts, pay freezes, job losses. The purpose of this is to boost competitiveness in the international market. For both inflation and growth to remain low, the policy would have to fail spectacularly. Inflation at least is pretty much guaranteed to return with a vengeance after a process like that, and I would expect growth to be fairly unavoidable too.

As for his claim that insolvency for a country is equivalent to death for a person, well that's just shameless histrionics of the most moronic variety.