Tuesday, 7 December 2010

A referendum to default

I recently commented on an article by Daniel Hannan:
Mr Hannan, do you believe the Irish people should be offered a referendum on whether to repudiate the debts run up by their bankers and politicians?

Offered such a choice, there would be very little doubt of the outcome. 93% of Icelanders were disinclined to honour other people's debts.
I'll post an update here if anyone provides a convincing reason why the Irish should not be offered this referendum.

In a Money Week article prior to the Icelandic referendum, Matthew Lynn explained why he thought Iceland would be right to default on its debts:
The debts were not, let's remember, run up by the Icelandic government, or by the Icelandic people. They were run up by a few wild bankers who swallowed too much of their own propaganda, and expanded with a recklessness that makes even Sir Fred Goodwin's reign at Royal Bank of Scotland look sober and responsible by comparison.
If Iceland voted no, it would give people pause for thought right around the world. Why, for example, should the British taxpayer have to spend billions bailing-out the mistakes made by RBS?

The case against Iceland rests on the idea that national governments should stand behind the liabilities of banks that happen to be domiciled in their country. And that taxpayers should always ultimately pay for bankers mistakes. Yet that is precisely what we should be trying to change.
Following Rothbard, I'd argue that even if the debts had been run up by the Icelandic government, the Icelandic people shouldn't feel obliged to pay.
Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from "normal" public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew?
The Irish should be offered a referendum on whether to default. So should we. Anyone who would deny such a referendum is not a believer in democracy.

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