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Extract This crisis shows the old ways have failed – and we’re on the cusp of new discoveries

I am an economics student, so you might be surprised to hear that I’m somewhat optimistic about our future. Why? Because we are passing through a unique window of opportunity to change our world, writes Robert Nielsen.

AS AN ECONOMICS student, the first question I am invariably asked is: ‘How are we going to fix the economy?’ Or, to put it another way: ‘How do we end the recession?’

It hardly needs to be said, but Ireland’s economy is in a deep crisis: unemployment is high, growth is stagnant and emigration is rising. As well as this, we are being crushed by the weight of the bank debt.

It may be surprising that I am somewhat optimistic. This crisis shows that the old ways have failed and that we are on the cusp of new discoveries. The old model is discredited and fit to be dumped and a new one must be built in its place. It is exciting to know that the world is about to change and there are vast possibilities for breakthroughs. We are passing through a unique window of opportunity to change the view of the world. We must not let this chance slip.

This is not uncharted territory

We have been here before. This is not uncharted territory where we must blindly wander. We can learn from the examples of the past. This is the worst crisis since the Great Depression – so surely we should examine the solution to that depression to find clues to solving our current one. What worked then may well work now. How was the last spell of mass unemployment solved?

The solution to the Great Depression of the 1930s was provided by John Maynard Keynes, the legendary British economist. He argued not for austerity but for stimulus. For Keynes, the boom, not the bust, was the time for cutbacks. When the economy is weak and private businesses are not spending, then the government must take its place by spending and investing when private business will not.

How does this work? How does stimulus help the economy and austerity harm it? In any given society, people and their actions are interconnected. When you spend money you provide income for a business that can then spend that money on wages, which is then spent by employees and becomes income for another business and so on.

It is because of this interconnectedness that massive job losses in the construction industry brought down the rest of the economy. If fewer people buy houses then there is less demand for houses, so construction firms don’t hire people, so more people become unemployed, so they spend less money generally, which affects the rest of the economy. This is how the economy so quickly went into a downward spiral. It becomes a vicious cycle.

Breaking the cycle

How do we break the cycle? Surely if less spending caused it, then more spending is the solution. But who will do the spending? The economy will only recover if we all spend; if only one person does it, this person uses up their money and the economy doesn’t recover. So everyone wants the other person to spend and so, as a result, no one spends and the economy stagnates. This is where the government steps in, not because it is the best option, but because it is the only option. The government is so large that when it spends money, this has a large effect on the economy.

But didn’t spending get us into this mess? How can that be the solution? Economics is not a morality play, we do not prosper through being virtuous and pure nor does fate punish the wicked. There is no cure-all solution, what is today’s problem may be tomorrow’s solution.

We must spend when times are tough, not because that is our preferred option but because it is the only proven way of getting out of a recession. If consumers won’t spend, then governments must. It is during the good times that we can afford to be thrifty and save money; in tough times we have to dip into our savings.

Tackling unemployment is the key

You cannot balance the budget with 14 per cent unemployment. Attempts to do so are like trying to push a boulder up a hill: every time you push it up a bit, it rolls back down again. When such a large proportion of the workforce is being wasted in forced idleness, the economy will not function properly.

While unemployed, they are costing the state in welfare payments and their lack of employment also means that they aren’t paying income tax. By enabling these people to work, not only does the government help to restore the individuals’ sense of dignity and self-worth but it also significantly boosts the economy and moves us all towards a balanced budget.

This extract is from the book New Thinking = New Ireland, published by Gill & Macmillan, which features essays by 21 young Irish thinkers who present their vision for a new Ireland.

With ambitions to be an economist or writer, Robert Nielsen was winner of the Business and Economics category of The Undergraduate Awards in 2012 and he has just graduated from University College Dublin with a BA in Economics and Politics. One of the striking things about Robert is that he wanted to study these topics in order to help solve the economic crisis. He blogs regularly and he has featured on student and other radio programmes (though he insists he is quiet and thoughtful). Robert exemplifies the mindset of his generation, which believes that past mistakes borne out of greed should never be repeated. His vision is for a more fair and just society.

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38 Comments
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    Mute Eoin O Colgain
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    Sep 30th 2013, 7:24 AM

    “It is during the good times that we can afford to be thrifty and save money; in tough times we have to dip into our savings.”

    Very little saving going on in Ireland during the good times and the debt now is immense. Even the national pension fund has been tapped.

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    Mute Michelle Mc Loughney
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    Sep 30th 2013, 12:38 PM

    What are ‘savings’ ?

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    Mute Michael O' Keeffe
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    Sep 30th 2013, 7:24 AM

    What a idealist. He will learn Boom and bust are part of the economic Capitalist system at some stage. bless him.

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    Mute Jim Brady
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    Sep 30th 2013, 7:30 AM

    Not helpful

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    Mute Tom Newnewman
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    Sep 30th 2013, 7:53 AM

    The mindless stimulus of pumping credit into the system is the cause of the problem. Only The creation of Productive jobs is valid stimulus

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    Mute Craven_Lickspittles
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    Sep 30th 2013, 9:58 AM

    Whilst I respect the fact that the guy who wrote this is still only young, it was disappointing to read a young economist who promised to talk about some innovative ideas for the future of the Irish economy and then proceeded to conduct a monologue based on the same, long-standing economic ideologies that defined the second half of the twentieth century: the ideas of Keynesian economics in conflict with those of Hayek and Friedman.

    Why couldn’t he have talked about Richard Wolff’s interesting idea about ‘worker-directed enterprises’? Why not discuss a greater level of transparency in the tax system through providing every tax-payer with a balance sheet at the end of each year to show them where their taxes went and how they were spent? Such a measure might actually make people start to believe in the good of taxes rather than seeing them as an unjust imposition. Why not step outside of financial economics completely and promote moral economics through the teaching of secular ethics and morality from the ages of 4-18? Our current crisis, after all, is as much (if not more) about a failure of these phenomena as it is about complicated financial algorithms.

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    Mute Robert Nielsen
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    Sep 30th 2013, 4:49 PM

    Funnily enough I actually do discuss democratically owned companies (though without naming Wolff directly) in the second half of the chapter (the extract is only about one third of the chapter). I don’t think telling people how much tax they pay would revolutionise anything, it would probably just make people angry. I obviously couldn’t discuss every part of the country in only a thousand words so I decided to focus on the one area of economics.

    We don’t need to re-invent the wheel in order to boost the economy. So you might think that Keynes is an old issue but I’m showing that my idea is feasible. How far do you think I would get if I proposed an idea that no else supported and had never been implemented?

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    Mute Sean O'Keeffe
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    Sep 30th 2013, 5:17 PM

    Robert, successive governments pursued deficit spending during the 1970′s and 80′s. It did not work and has never been shown to work in any economy that has experienced a severe contraction.
    Did you not cover this in college?
    You suggest in your article that a new approach is needed. What is this new approach?

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    Mute Craven_Lickspittles
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    Sep 30th 2013, 7:46 PM

    Hi Robert,

    First off thanks for replying to the questions I posed in my initial comment. However, I would like to in turn reply also.

    I apologize for skimming over the fact it was an extract from your chapter in New Thinking = New Ireland. I would actually like to the read the rest of what you have to say so I may well buy the book.

    However, the points I made above still stand: you dedicated the whole of the article above to talking about the merits of Keynesian economics when the title of the piece was ‘The crisis shows the old ways have failed – and we’re on the cusp of new discoveries’. I thought it was a shame that the article didn’t talk about innovations such as democratically-owned companies, for example, but referred solely to an economic mode of thought that has been with us for over half a century. I don’t have a problem with discussing Keynesian approaches to the current crisis, although given the nature of the crisis as one of mainly highly indebted governments I’m not too sure how this would work, but if that was going to be the thrust of the article then it could have been titled more appropriately. Whether or not that was your remit or a sub-editor at The Journal’s is unclear.

    As far as the tax issue is concerned, I think you have misread my argument. I don’t want to see people ‘told’ how much tax they pay; they already know that because they have access to what various rates of tax are and can, if they so wish, calculate their tax burden. What I was suggesting was that people were given a break down of where their tax money was spent and how they helped to fund public services in an attempt to change the culture we have at present, in a number of countries, that tax is something to be avoided rather than a contribution to our local, regional and national communities.

    Finally, I revert back to the point I made above: if you were expounding the merits of Keynesian economics to our current crisis then I think the article could have been framed more effectively. For what it is worth, if you proposed an idea that no one else supported and had never implemented, but you held it to be of sound logic and original thinking, I for one would commend you for it.

    Might I just clarify that I didn’t mean my comment to be a personal attack on you – I made implicit reference to this in my initial comment. I meant that comment to be a form of constructive criticism and measured opinion to a public debate on the article you wrote.

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    Mute Alan O'Brien
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    Sep 30th 2013, 7:18 AM

    So…. Borrow more money to solve our indebted country??

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    Mute Gerry Grimes
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    Sep 30th 2013, 9:59 AM

    We either invest in the future or languish in Muinteor Noonans Nether Land for the next generation.
    Along with developing our natural resources we need a functional banking system and we need to build houses, like it or not.
    FG and their poodle party have abysmally failed to recognise the need for benefits of growth. Which leaves us with the appalling vista of FF in power again. But I see no other realistic alternative.

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    Mute Niall
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    Sep 30th 2013, 7:37 AM

    Nonsense article. The recovery from the Great Depression was down to the world having a smaller population and the boom in oil production.
    That is not the case today. Peak oil production has come and gone hence the lack of economic growth worldwide

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    Mute shay o'reilly
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    Sep 30th 2013, 7:40 AM

    Give him a break , he’s young

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    Mute Alan Kennedy
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    Sep 30th 2013, 9:44 AM

    Being young isn’t a shield for critical commentary, in particular when you widely publish your ideas.

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    Mute Solbank Sabadell
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    Sep 30th 2013, 7:28 AM

    It’s a nice article but with most corrupt and dangerous government in history of state and Germany pulling the strings are we not just an out post for holding the slaves.

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    Mute James Darby
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    Sep 30th 2013, 7:43 AM

    “Corrupt and dangerous”, that answers my question then. Sure thats where all the money is stashed. What a statement!

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    Mute Ger Ryan
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    Sep 30th 2013, 7:48 AM

    “Most corrupt and dangerous”. … you obviously forgot al of the fianna fail gun running, the phone tapping, haughey being in the pocket of every businessman in the country, lawlor, ray burke, bertie ahern getting a little loan to tide him
    How in the name of all which is holy and blessed can you call this gov the most corrupt and dangerous???

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    Mute shay o'reilly
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    Sep 30th 2013, 7:22 AM

    Nothing new , however in the 1980s people were talking about, not enough jobs for all, and that some should receive payments as members of society, using their leisure time for their and societies benefit ,
    Can there been meaningful jobs for all, I’d doubt it, jobs that are jobs for jobs sake, aren’t jobs at all and don’t help the soul of the individual doing them

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    Mute Silent Majority
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    Sep 30th 2013, 10:47 AM

    Spot on. We keep hearing we need more jobs, and celebrating when new positions are announced, yet rarely do we ask what is it we really need done. The doubling of the workforce without a corresponding growth in population due to the feminist movement, and the unprecedented efficiency growth as a result of technological advances since the 80s have resulted in high unemployment rates globally without any shortages in production. Public services have become stretched, particularly in Europe, due to the austerity agenda, but this is as a result of the inevitable fall off in employment in many private sector areas and a no longer fit for purpose monetary system. This issue will only become more pronounced with the advent of 3D printing set to revolutionise massive swathes of the manufacturing sector.
    What we really need to be asking is, if there are so many people unemployed, yet we don’t really seem to be lacking anything, then should we all continue to work so much or is it time to step back and enjoy some of the benefits of the most innovative period of human history?

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    Mute Angela Flynn
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    Sep 30th 2013, 7:55 AM

    Good article Robert, well done. For a minute there at the start I thought you were going to offer a really radical alternative solution. I thought you were beginning to suggest scrapping the capitalist system and an alternative to neoliberal economic policies… *sigh*

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    Mute James Darby
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    Sep 30th 2013, 7:35 AM

    So where is this big wad of savings the government has to spend.

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    Mute Kev Dunne
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    Sep 30th 2013, 8:31 AM

    While I’d agree that neoliberalism has failed, there is no sign that the political classes think so. Certainly we have one of the most market obsessed governments we have ever had at the moment. Look also at how Neoliberals are shutting down the USA this morning. Interesting though that the best he can offer as an alternative is Keynes. Neoliberals hate Keynes! There are too many politicians raised on reganism and thatcherism to whom Keynes is anathema so I think it will be a long time before they cop on that the game is up. The other problem is the great depression was not a problem of government debt, as our current situation is. So spending by government is much more difficult this time.

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    Mute Pat O'Brien
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    Sep 30th 2013, 9:20 AM

    I’m sure he’s a smart guy and while he has certainly learnt his lessons for his degree there’s much more to go.
    People who subscribe to ideologies like those who argue end to capitalism or more deregulation are the problem. There is no single answer to fix things in economics. It has to be a mix and blend of ideas and theories tailored to fit the economy of the day. That is why our world is so different to that of the Great Depression or of even the eighties. Of course more jobs and more spending will help us grow the economy again. But the problem of debt will now persist for many years to come.

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    Mute David Dolan
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    Sep 30th 2013, 9:42 AM

    As long as money is created through debt it will always be a problem.

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    Mute One-Off Ireland
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    Sep 30th 2013, 9:56 AM

    absolutely

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    Mute Pat O'Brien
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    Sep 30th 2013, 1:13 PM

    Not really we can’t return to the gold standard. I understand what you’re saying the whole quantitive easing thing will not turn out good. But money works fine when there is true valu to it backed up by the assets and goods produced within the economy.

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    Mute Danny Supafly Kehoe
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    Sep 30th 2013, 2:12 PM

    we are not on the cusp of a new way of doing things. They (governments, banks) will keep doing the same as they always have because reform of the system will take the power away from those with it! Ireland is such an open economy that any stimulus that is done will not have a great effect on the economy. Consumers may spend more money but they would more likely spend it on goods manufactured somewhere else in the world, so instead of the money being kept within the Irish economy it would be flowing outwards to another country creating more of a stimulus for them. The multiplier effect really only works on larger economies. We are in a spiral already because we are getting into more debt to get out of debt???makes no sense at all really! and the higher the reserve ratio the banks have to keep the tighter the money supply will be! so its all self defeating.

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    Mute One-Off Ireland
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    Sep 30th 2013, 9:10 AM

    of course, we don’t have control over our own money supply so Keynesian solutions are out, as Maggie Tatcher would say

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    Mute Sexy Taoiseach
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    Sep 30th 2013, 8:44 AM

    What about our pension problem that is going to make the bank problem look small you forget that.

    What about when interest rates rise the impact of that nobody looking at that either.

    We are not even close to been out of the shi*

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    Mute frank mullen
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    Sep 30th 2013, 9:20 AM

    Rubbish article manufacturing is all overseas so spending more will increase our debt and make China stronger !!

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    Mute Sean O'Keeffe
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    Sep 30th 2013, 4:06 PM

    Exactly right Frank. The economist Edward Nelson explains here why Keynesianism inspired deficit spending delayed Ireland’s recovery following the seventies crisis.

    Ireland and Switzerland: The jagged edges of the Great Inflation, Working Paper, Federal Reserve Bank St Louis, 2006

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    Mute John McGroarty
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    Sep 30th 2013, 9:05 AM

    Corruption there has been without doubt, in respect of people here who were educated and trained to know better but decided, for greed fuelled reasons, to ‘look after No 1′. However, on the scale of global corruption it’s worth remembering that our corruption eruptions are positively miniscule. Nevertheless the damage to our economy has been catastrophic.

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    Mute George Forsyth Jnr
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    Sep 30th 2013, 8:42 AM

    How condescending is this writer? There’s nothing at all interesting about this article, it merely regurgitates what had been said before. Also the great change he talks of seems to be the same model of the past so in truth it’s no change at all.

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    Mute One-Off Ireland
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    Sep 30th 2013, 9:17 AM

    There is a element of naievity and I am sure he would have more to say with a greater word count. However, it is worrying to know that economics education has not moved on. They should start with deconstructing the production function and the constant omission of natural resources, particularly energy. Also, why did Keynesianism fail in the 1970s?

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    Mute Sean O'Keeffe
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    Sep 30th 2013, 5:01 PM

    When the world economy fell victim to stagflation (simultaneous high rates of unemployment and inflation) in the 1970°s Keynesianism was exposed as fallacious. Keynesians had previously argued that higher inflation benefitted job creation. It doesn’t.
    Paul Volckers prescription was to raise interest rates. An approach that was lambasted by Keynesians. In the event it proved the only way to combat inflation and allow economic recovery to begin.
    Keynesianism remains largely discredited to this day except amongst academics, politicians and various other cranks.

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    Mute Eric Davies
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    Sep 30th 2013, 1:50 PM

    how can people spend when theres nothing left to spend, this (and the previous) governments insistence on propping up the private banking institutions and paying out to speculators in the financial institutions,while enforcing ‘austerity’ measures on the rest of irish sociaty, results in people having no spending power, at the same time the self same governments have no control over our financial problems as they have signed them all over to the troika. the whole sorry mess is down to greed, lack of regulation and corruption in high places.
    even today after all this country has been dragged through there is to be no action taken by the central bank with regards to anglo and its executive officers, why? is it because their scared of the truth coming out,? scared that the public will find out that those very speculators and bondholders are amongst the people who hold office in this country? scared that the ordinary person finds out which of out political big boys managed to get a ‘sweetheart’ deal from one of the ‘big four’ banks? scared that if and when this information does hit the streets, then there will be no hiding place for those involved?.
    this ‘recession’ has been created by european and world policies , the over reliance on borrowing ,the urging by governments for people to buy not 1 but 3 or 4 properties, driven by the greed of those self same financial institutions, that knew that if things went wrong they would be able to force governments to save their skins and still end up with their jobs and saleries intact.
    what have the banks/ finance houses lost in this recession? very little thats what, mortgage holders have lost their jobs ,their homes and worst of all their dignity and good name, for the banks it ‘win- win’ cant pay your mortgage/ we’ll reposses your home then we’ll sell it on and you still have to pay what you owe! even if they fail to sell on the property it’s still on their ‘portfollio’ for when things get better, or with the help(again) of the governemnt they’ll sell it to the local authority so as you can still live there,but have to pay rent to the council and your mortgage to the bank, leaving you with even less money for luxuries such as food, heating, bills etc.
    this whole situation has been a st up from start to finish, the big german banks that lent to irish,spanish, greek and portugese banks are the same ones that contributed to the bailout of these countries, this effectivly handed control of these countries finances to the german government, dont forget that before any of these countries can pass a budget, germany has to approve it first .
    ireland has gas and oil of its coasts, forestry, agriculture and enough wind and wave power to make it ripe for energy production , what does our government do? it gives away the very things that could reflote the econamy and get us out of debt, why / because the troika told them too , smaller countries are being taken for mugs by the eu and germany still holds its dream of running europe its way.

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    Mute Katriona Wallace
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    Sep 30th 2013, 1:50 PM

    “While unemployed, they are costing the state in welfare payments and their lack of employment also means that they aren’t paying income tax. By enabling these people to work, not only does the government help to restore the individuals’ sense of dignity and self-worth but it also significantly boosts the economy and moves us all towards a balanced budget.”
    I am unemployed though the mis-management of the economy, based on advice given by very economists that the writer aspires to become.Thankfully not everyone is as stupid or shortsighted as the writer thinks, I too, studied economics as a module of my degree; common sense and logic are out the window. Opportunities regardless of the consequences are part of the course.

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    Mute phunkyboy
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    Oct 9th 2013, 11:52 PM

    He’s right about change only it’s not of the economic kind. People are rejecting their governments and it’s going to happeb soon here. Maybe not a riot or the like but a general apathy that will put govt in their place for once and for all.

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