The cause of and solution to all of life's problems

The Cause

There is a theory doing the rounds about the global financial meltdown and it goes like this: the western economic model requires growth but there has been no "real" economic growth for the last ten to twenty years.

And, ten or twenty years ago, government, staring impotently at an unstoppable but gradually emerging recession, looked in desperation to the financial sector and wondered if that could help stimulate the economy. The financial sector eagerly responded and started speculating with savings in the way it used to gamble only with investments.

As "real" growth further tapered off, western governments leaned heavier upon the financial sector which in turn asked for leeway so it might devise ever more complex money-creation schemes.

Competitive deregulation resulted and soon the economic system transformed from its historic reliance on traditional "real" productivity to its new dependence on very cheap credit created by banks. This mutation is sometimes referred to as "the financialisation of capitalism".

The arcane financial instruments that were created by the banks to generate all this growth became farcical: In the US, subprime mortgage loans were split up into bits and pieces that were strewn in with fragments of better assets. The contaminated bundles were then passed off by the banks as low-risk collateral. As the poor quality components were ignored, these securities obtained greater leverage than they should have, propounding the original exposure. [1] 

And that was just the start of it: sub-prime has been estimated as a $1.5 trillion bubble.  In 2008 an organisation known as the Asymmetric Threats Contingency Alliance estimated the total size of all the credit bubble devices to be $1 quadrillion.  

Money was magicked into existence with no regard to the underlying risk. Cheap credit flooded everywhere. Attitudes were engineered: consumption of pap for debt was positively enforced by media. And over and over this went. 

In 2007, gradually at first then all at once, US subprime mortgages defaulted and their backup securitised collateral was realised as the junk it was. When the securities were called for the edifice cracked apart. As Warren Buffet might say, the tide went out to reveal Lehmans, Iceland and Ireland swimming naked.

The system never recovered. Doubtful confidence wavered then withdrew.

The same tide has ebbed out and flowed in several times but it has taken several sudden outward heaves and has generally receded, revealing in its wake a banking or sovereign debt disaster in every European nation. [5]

What looked to us like growth was actually the financial system creating debt - and lots of it. The entities that own that debt are other banks  (i.e deposit holders) and pension funds (i.e anybody) and private holders (e.g. Roman Abramovich/Apple) and other countries (e.g. Japanese NTMA-equivalents) and so on. These entities have "wealth". All the money in the world, really. And they want that money instantiated. And they, as they have "wealth", have influence.

So these organisations will be paid and if European sovereigns are subjugated in order to achieve that, then so be it.  

We are now faced with a triple crisis: First, the credit bubble has burst. The west had gotten very used to easy credit. Some people leveraged assets bought with borrowed money for more borrowed money, inflating secondary property bubbles, creating employment and government revenue all round. Now with all the credit dried up, and the bubbles popped, we are left with a huge gap between government spending and tax revenues. So a reduction of structural deficits through austerity, while probably wrongheaded, appears to be the norm.

Second, the debt created by the bubble is still owed - and policy appears to dictate that the citizens have to pay back all the money the banks lost when they securitised all that new debt on flimsy collateral and swapped it around between themselves  [2].

And third, we're about to find out what life would have been like without the fake growth.

So why did we need to turn to the banks to preserve western living standards in the first place? All those years ago?

Capitalism's innate flaw, oil prices and globalisation have all been loudly accused and they may well be guilty.  But did they act alone? There have been murmurs about another culprit, said to be the real brains behind the operation: Technology.

It is now being commonly discussed that we have eliminated millions of jobs by implementing massively centralised production systems [3], factory automation, IT systems, and billion dollar companies with relatively few employees.

This is, of course, not a new angle: in the Great Depression of the 1930s, technology was also considered a contributor (even by Keynes himself).

Financialised capitalism may well provoke a major reaction as it wrings all the value it can out of us, but if or when that reset occurs is impossible to say.  In the meantime...

The Solution

There is no stopping progress. If you can't beat it join it. To ensure Ireland doesn't face another Hungry Thirties, we must seize the opportunities presented by the current technological transition.

We should have the manoeuvrability: as John Mauldin recently wrote on his visit here, "First off, even though we think of Ireland as a country, it is in reality a nice-sized city. Ireland is a little under 4.5 million in population (with another 1.8 million in Northern Ireland)". Ireland is an "open economy", we are told.

But we have vastly inappropriate skills: from the established cadre of generalists in the Department of Finance who helped steer the country onto the rocks, to the last misdirected decade of unemployed (but talented) new architects and non-specialist (but well-educated) arts graduates.

The EU education report published on April 19 this year shows:

..that 49% of 30-34 year olds in Ireland have a third level qualification - well exceeding the 'Europe 2020' target of 40% set two years ago. However, Ireland was the worst performer for increasing numbers of maths, science and technology graduates, with a boost of only 1% between 2000 and 2008. The numbers of women science graduates actually fell in that period.


And according to last year's OECD report,

On reading levels among 15-year-olds, Ireland slipped from fifth place in 2000 to 17th place, while in maths Ireland fell from 16th to 26th.


No wonder companies like Google, Intel and Ericsson must cast their nets wide to find suitable candidates to fill Irish vacancies. Our schools don't provide the people. For the coming reality, third-level should be looked upon not as "education" in the Victorian sense but as "training". And Science, Engineering and Technology ("SET") are skills we need for the future.

The Education Minister is right in his attention to second-level maths, but he should broaden his scope to all sciences and he should bring a new IT subject into both primary and secondary curricula. The UK - our closest trading partner and greatest competitor -  has realised this and just last week the BBC announced that "Coding is the new Latin" while The Telegraph wrote "Children to be taught to create software".  

The Irish government should adopt similar policies with urgency. The Broadcasting Act should be updated to ensure that Science and Technology is considered a funding topic that falls under the public service mandate so that these subjects, through exposure, become demystified and even ingrained as part of the fibre of Irish life.  

And it is not just programming: Ireland has aimed high to become a centre of R&D in the nanotech, biotech, medical and security fields.  Biology, chemistry, physics and computer sciences are converging in incredibly interesting ways[4].

Ireland has the range, the machinery, we have the thirst. And we have the opportunity.

In the meantime, if you have kids they can get a headstart. There are several technology courses in Ireland specifically aimed at children. Here are some courses for you to check out (the first two come recommended, I don't know anyone who's been on the third):


[1] And that's not to mention Credit Default Swaps, the extent of which we have yet to experience. See footnote 2

[2] Not just Ireland. By one estimate 10% to 20% of Western banks will be wiped out in the next year. 

[3]  Food production is a sector that appears to be beginning to reverse from its current state of massively-centralised production. This is another opportunity for Ireland.  For a start we should reopen that sugar factory!

[4] MIT on convergence 2011 - PDF WARNING 

[5] Details omitted. See Kevin O'Rourke's presentation which describes how badly the Euro was made.