A week in higher education

This is an expanded and linked version of the column “My Education Week” which appears each Tuesday in the Irish Times.

This week is Trinity Week, culminating in the Trinity Ball, which means teaching semester is over. Which, if one believes everything one reads in the papers means that I and every other third level academic is off work until the autumn…would that this were so, but it remains a pleasant fantasy. No scheduled teaching means one can catch up further on the Sisyphean tasks of administration, research and student management! The perception of lazy academics is one that is all too common, but recent research suggests an average working week of 50h, above that of the european norm. Its a sad commentary on irish public discourse when research, carried out by a highly prolific academic in her area, is dismissed and all but called academic fraud by commentators simply because it doesnt conform to expectations. That coarsening of debate is something about which as academics we should be most concerned.

Sunday evening is generally when both I and Mrs Prof, a primary school teacher, organize our work week. She plans the weeks lessons, I outline my ‘to do’ lists and deal with any weekend issues. As a college tutor in TCD one finds oneself dealing with all sorts of odd requests above and beyond the norm. This Sunday the fire to be fought is a student who has that weekend been given a chance to go on an internship in Singapore, very relevant to her degree, but this would entail missing examinations and a decision is needed fast. I email her, she rings me, we talk and plot out a route to be tried on Monday morning.

Monday morning I stop off in Kildare FM en route to work, and talk for half hour on both my new book “what if Ireland defaults” and on general economic issues. Local radio is a powerful force in Ireland, and too often ignored by commentators. Part of the job of all professors is to profess and what better way than to discuss ones works with the public who after all pay a large chunk of my salary! The remainder of the morning is taken up with finalising my thoughts on paper for my appearance on Wednesday at the Oireachtas Subcommittee on European Affairs, regarding the Fiscal Compact. Monday is Trinity Monday and as always there’s a great buzz in Front square when the names of new scholars and fellows are announced. Its hard to think that its nearly 10 years since I was made fellow. Time flies when your having fun! This year there are 103 scholars, a record, reflecting the exceptional quality of students we are privileged to have. The afternoon is taken up with finalising and submitting a paper, a meta analysis of research on the linkage between property values and aggregate stock/bond market returns, to a US journal. Submission costs €125 and I decide to pay that myself rather than dip into my research funds (where I divert my media earnings) which I use for travel for myself and for postgraduates and for things like launching books….

Tuesday The MSc in Finance in TCD is unique Ireland in its range of professional partnerships, with linkages established with Bloomberg, PRMIA, CFA and CIMA (the signing ceremony of which is shown here). I set aside time to talk to MSc Finance students, but some exam issues mean that a number cant make it. We talk anyhow to those that can make it and reschedule the rest. These are students who are to be under my supervisory wing throughout the summer as they undertake their dissertation which accounts for 1/3 of their degree. I have 10 to manage but am also the general ‘go to’ person in the supervisory group for issues around data and statistical analyses beyond the norm so I usually get to see most of the 50 plus students at some stage. The students will work on these projects for the summer and hand up the work in late august. Some projects are industry linked, others are pure research, others expanding on previous work. Of the ten students I am supervising 3 are Irish. The projects range from analyses of option pricing, through dividend policies, to work on the determinants of personal financial risk taking. Its hugely challenging and enormously rewarding each summer to work with the masters students on their projects. We get an update from the head of school on the fundraising for the new Business School Building (going surprisingly well given the times that are in it) and news that a new colleague has accepted (at lecturer level) the position in strategic management which was created when Professor John Murray died, 18 months ago. The norm now in irish academia is that no matter how senior, experienced and internationally well qualified and recognized is a person, if they depart and are replaced at all that will be at the lower end of the scale. It takes time, and experience to mature as an academic as for any post. We are eroding academia from the top down. I talk to a Finnish newspaper on the Irish banking collapse, and they keep asking the same question as all overseas commentators do : why on earth did we do the bank guarantee. I have no printable answer…

Wednesday the Dean of Students Honor Roll is announced, recognizing students for non-academic involvement in college life, such as volunteering and tutoring/mentoring second level students in the inner city. Of the 400 honoured 38 are business students. College is of course much more than simply classes and the creation of rounded socially aware business graduates cannot be but a good thing for the future. The morning is taken up with attendance at the Oireachtas Subcommittee, in the company of several others, namely Jimmy Kelly and Michael Taft of UNITE and Megan Greene. Presentations are here (me, Greene, Kelly, Taft, and here is a link to the transcript of the debate). While one might decry the antics of the Oireachtas at times, it is our sovereign parliament and it both is and should be an honour to be asked to present ones views to it for consideration. I certainly take that perspective. We present our views on the fiscal compact; I concentrate on the effect of same on the financial markets, while the others concentrate on the macroeconomics. We have a good round of questioning.

Afterwards I have lunch with Megan, who is senior economist with Roubini Global Economics, who also attended the committee. Over lunch we have a lively exchange with some parliamentary researchers about the future of the Euro. In the afternoon i catch up on some emails about the UK and Ireland Chapter of the Academy of International Business , on whose executive i sit, and attend to my role as Editor of a journal (Research in International Business and Finance) I divert a query from a Sunday newspaper to someone who knows more about it than me. and get pleasant news with a paper accepted to a reasonably decent US based journal, subject to some minor (mainly editorial) changes.

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Thursday involves sorting out the sessions for a large conference I run every year, with over 150 papers in all areas of finance. As usual in excess of 95% of the papers are from overseas, and we expect about 200 delegates. Having run this for 10 years in Ireland, it’s probable that the conference will go overseas from 2013, as the lack of sponsorship from domestic financial institutions makes running it here increasingly difficult. Despite having attracted Nobel laureates, having attained significant international credibility, being linked with one of the top international journals in finance and having had present each year the leading finance researchers there is worryingly little commercial interest in pure knowledge. This is in stark contrast to France and Italy where the conference is bound for the next decade and where financial institutions are more than willing to interact from the very start with academia I also catch up with some PhD students, and we discuss how they will overcome some issues, publicise the research and discuss how to interact with an overseas financial institution which is funding one study. I talk to a Norwegian academic who is researching the Irish banking crisis, and try not to be embarrassed when they note that not only did they not get anywhere in getting an interview with official sources they didn’t even get a reply. We have a long way to go yet before we realise that sunlight is the best disinfectant. We seem to have not only zombie banks but vampire-like openness in the permanent government.Later in the afternoon I meet with the people from Orpen press, and we discuss a series of talks to be held in bookshops to push the debate which we have opened with the book “what if Ireland default”

Friday I spend working from home, as I try to do each week for at least a day. Knowledge work requires a brain and a pc. The physical location is of minor relevance, and research requires for me at least uninterrupted time to think and muse. While the work of science academics typically requires them to be at their benches etc to do experiments, for arts, humanities and social science research this is not the case. There is a recent push towards trying to tie academics to their desks : this not only flies in the face of government policies on teleworking it is wholly misguided. So, the attic it is, where I work to finish a paper on small firm finance I am doing with a colleague in DCU and another collaborative project on gold prices which involves researchers in the USA and Australia. While none of these will generate patents they should I hope advance human knowledge a little bit.
What Im listening to : I generally stream baroque or early church choral music when im doing writing or research, and for walking/commuting 1970’s and 80’s rock such as Led Zeppelin, Lizzy, Guns n Roses….

What Im reading : In the Shadow of the Sword by Tom Holland and Blue Remembered Earth by Alastair Reynolds.

What Im watching : The Good Wife and Homeland, two top notch US series. Also Game of Thrones and Alcatraz

The Fiscal Compact and Ireland

I was asked to address the Oireachtas Subcommittee on European Affairs on the issue of the Fiscal Compact, and did so this morning (18 May 2012). Below is the briefing note which I forwarded to the members. We were asked to be succinct and to talk for 5 minutes prior to questioning, hence the rather stripped down nature of the material.

I have previously expressed my concerns on the fiscal compact in a number of fora, including my blog and my fortnightly column in the Irish Examiner. We are in effect being asked to incorporate into our constitution an econometric concept in order to become more Germanic. It is as Davy Stockbrokers put it in February “an abstract theoretical economic concept that cannot be observed with certainty.” We are therefore asked to support the immeasurable in pursuit of the unattainable. The only rational argument to support the compact is one of utter expediency : as we will require access to ESM funds from 2013 onward, whether we call it a ludicrous word such as “bailout” or a mere technical extension of the present “bailout”, and as such funds are as of now contingent on the fiscal compact, we need to think long and hard before rejecting it.In the context of the committee today, I have a number of points.

1. Ireland as a state is broke. This is not an ideological but an arithmetic matter. We are forecast to have a net exchequer balance of -€21b in 2012, which is in the largest part made up of current expenditure running at €51b while current revenue reaches only €38b. Thus any proposal that can hold out a prospect of reducing this towards zero, especially on the current side, is to be carefully examined. That is not to say that I welcome the Fiscal Compact unreservedly- I do not. It has many issues which I would like to see modified, changed, dropped or better phrased. As the focus here is on the effect of the treaty were it to be adopted let me concentrate on that.
2. Trajectory of debt. The fiscal compact states a maximum permissible deficit of 0.5% of GDP. It is easy to work out that with modest growth of nominal GDP the deficit rule will result in a long-term debt to GDP ratio of extremely low levels. The stable steady state debt/gdp ratio converges to d/g, where d is the average nominal deficit as a % GDP and g is the average nominal GDP growth. Since 1980 the average deficit has been 4.1% with average GDP growth at 8.2%. The figures since 2000 are 2.8% and 4.8%. We will if we wish to achieve the 60% debt to GDP figures have to achieve a nominal growth rate of at least 2% while keeping deficits at 1% or less. We are forecast to have a structural deficit of 5.5% in 2012. To move to a 0.5% deficit therefore is a massive multibillion-euro demand shock. To move from the forecast 2015 115% debt/GDP ratio to the 60% permissible is to remove some 90b in debt from the stock of Irish government debt, or the equivalent of the entire national debt as of 2010. To do this will require that we run structural surpluses (or find somehow that austerity does in fact lead to growth in nominal GDP). Demand effects aside, one has to wonder if this is within the capacity of the state to achieve such a massive transformation?
3. An area of the treaty that has received scant analysis, surprisingly so, is the effect which it will have on bond markets and Europe.As noted we can amend the ratio of government debt to national income by decreasing debt and/or by increasing wealth. The focus of the compact is on the former. Europe as a whole is significantly over the 60% limit. As of 2011 eurostat figures the majority of individual countries are also over. Thus the adoption of the compact suggests a prolonged massive de leveraging of the European sovereign bond market. The euro 17 countries as a whole need to reduce debt/GDP ratios from 85% to 60%. At present terms that is a reduction of some 2.3 trillion euro. That is a massive fiscal drag to pose on Europe and compact is that if it succeeds it will gravely damage the sovereign bond market. Even well run countries such as Netherlands ( 2012 debt/GDP forecast 65%, 2012 GDP growth 1%, Unemployment 4.5%) and Austria ( 2012 forecasts Debt/GDP 73%, , Unemployment 4%, GDP growth 1%) will be required to retrench. This is not a recipe for growth in Europe, and given that exports are forecast to be the entire contribution to any GDP growth we may see will see the stifling of demand in one of our major markets. This point has been reiterated in the Financial Times which stated on Tuesday 17^th in its editorial “A fiscal compact worth its name would have matched belt-tightening in deficit countries with expansion in surplus countries. Universal austerity will instead erode the gains from fiscal discipline by stunting the economic output from which public and private debt can be serviced” It has also been critiqued by a wide variety of other market and academic economists (see this Reuters article for a synopsis of the argument) . Swabia housewives alone cannot reinvigorate Europe. Nouriel Roubin has stated “Without a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will not be restored, and the recession will deepen. And, without resumption of growth – not years down the line, but in 2012 – the stock and flow imbalances will become even more unsustainable. More Eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union.” Such policies are the direct opposite of what we now see, with strict money and frontloading of austerity. He further stated “The trouble is that the Eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming. A large (but not overwhelming) stock and flow of relatively low risk assets are required to support pension and investment funds. A shrunken market will be less able to fulfill that role. The fiscal compact therefore requires that over time trillions of euro of assets are removed from consideration of investors. The consequence of this will be an intensified move to safe haven assets such as the (to be radically shrunken) German bund market, driving down further German interest rates. Investors will have to accept radically lower long-term returns. Alternative investment classes seen as safe havens such as gold, or denominated in currencies such as the Norwegian kroner or Swiss franc will also attract investors, with knock-on consequences. The effect on Europe of a perpetual low cost of capital in the core and higher costs in the periphery cannot but exacerbate the existing core-periphery problems. In addition, low nominal rates lead ro negative real rates, a form of “financial repression” . Faced with a growing pension timebomb the shrinking of the pool of safe assets seems not sensible. Mercers 2011 Asset allocation survey indicates that most pension funds including Irish desired to increase not decrease their absolute and relative investment in domestic government bonds. There are plans to market up to 2b in domestic bonds to pension funds for annuity purposes. How these will be squared with decreases in the asset pool is unclear
4. The fiscal treaty contains not just a set of macroeconomic thresholds but also under the Alert Mechanism Report looks at a series of more detailed ‘warning signs’. (See below). The first of these came out in mid February and as one might expect these show Ireland (as well as Greece and Spain) as being problematic. The warning indicators are shown below (courtesy of a CitiBank report). In the February report Ireland was shown to be in breach of 6 of these ( also shown below). What is interesting in the recent Citibank report (see http://ftalphaville.ft.com/blog/2012/04/16/962221/return-of-the-stability-and-growth-pact/ ) is that while the Irish economy in the boom years would have shown relatively good adherence to the headline fiscal treaty requirements, there is some evidence that the indicators below would have triggered concern. Ireland began to exhibit significant numbers of breaches in 2004 onwards, mainly due to house prices, private sector debt, labor costs and real effective exchange rates. However, these were all a consequence of the credit boom. While a procedure now is available to fine countries that, having been found to be severely imbalance do not take steps to adjust towards balance, this fine is only up to 0.1% GDP . We are all now painfully aware of the political reaction that was evident (and voted for enthusiastically) when people were ‘cribbing and moaning’ as one Taoiseach so memorably put it. One can easily imagine the same Taoiseach cheerfully explaining how a fine of ‘eh, a few hunnered million’ was a small price to pay for the continuation of our unique way of achieving economic success. In other words, the flaw in the fiscal treaty is that it concentrates on trying to achieve political economy aims by exclusively economic means. Is there now and will there be in future the political will in Ireland to face down domestic calls for the ignoring of warnings?
5. There are a host of other issues with the compact that bear on domestic competency. First, we will need to ensure that we have domestic capacity to estimate independent credible (from a technical sense) structural budget estimates, in an economic environment where there are no set rules on how this is to be done. To do otherwise will be to force us to rely entirely on the commission. This will be a net additional resource requirement for universities, the fiscal council, ESRI or a new body. Below we see (courtesy of Davys http://www.davy.ie/content/pubarticles/fiscalcompact20120227.pdf and Dr Constantin Gurdgiv http://trueeconomics.blogspot.com/2012/03/2532012-irish-gdp-and-structural.html) how IMF and EU commission estimates of the structural deficit can differ wildly, and in the context of a strict limit this mattera. Is there willingness and resource to spend on this? Second, and following on from this, is there sufficient technical knowledge in both economic and negotiation skills in the government to argue the case where as is inevitable there will be divergence between the commission and the domestic estimates? Third, there is no mechanism that I can see whereby on re-estimation of the models countries that were previously deemed in deficit are now deemed in surplus (or vice versa) are ‘reimbursed’ for the mis-estimation de jure, and again will there be sufficient skill sets for such an argument? The experience of Ireland with regard to the promissory note saga suggests to me that we have demonstrated neither the technical nor the negotiation skills that would be required under either of the last two questions. Fourth, the present fiscal compact is one leg of a stool, and as such while it can work it will be a precarious balancing act. The interaction of government with society in the economic space consists of fiscal and monetary policy. We do not have government control at a European level over monetary policy, and again one can see the way in which this leads to direct countervailing of purposes where increased austerity over and above the domestic requirement is imposed in pursuit of a flawed monetary vision. This treaty will provide a (Germanic ordoliberal) common spending policy. What is missing is a common tax policy and a common policy on transfers. Is there domestic will or competence to open up the latter two as a European aim, with the certain knowledge that for compromise on one (transfers) compromise on the other (tax) will be demanded?

Macroeconomic Imbalance Indicators

Estimates of Structural Deficit

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What if Ireland Defaults?

Well, if you want to know the answer to that question you will have to buy my new book, which contains a bunch of essays.

Contributors include:

• Nobel Laureate Joseph Stiglitz
• Constantin Gurdgiev, Megan Greene, Seamus Coffey and  Stephen Kinsella
• Peter Mathews TD
• Senator Sean Barrett
• businessman and political activist Declan Ganley
• politics lecturer and journalist Elaine Byrne
• Sam Roberts, urban affairs correspondent for the New York Times
• Huginn Thorsteinsson, philosopher and adviser to the Icelandic Minister of Economic Affairs and the Icelandic Minister of Fisheries and Agriculture
• John Walsh, editor of Business & Finance
• Peter Brown, director of the Irish Institute of Financial Trading
• Karl Deeter, director of Irish Mortgage Brokers

Aimed at the general reader and published by Orpen Press it is available from all good bookstores and from Amazon.  An ebook/kindle version should be available by 6/April/12

The best man for a job in finance is probably a woman

This post is an extended version of an opinion piece published on 17 March in the Irish Examiner:http://www.irishexaminer.com/business/women-are-the-stabilising-hand-in-finance-187420.html

Last week we saw international women’s day, a day that in theory is devoted to the celebration of female achievement. It is celebrated as a public holiday in some countries, mainly those part of the ex soviet bloc, where the holiday originated. Originally an overtly political event that trumpeted the (real, if with mixed outcomes) achievements of the soviet state in enshrining women’s rights, it has more generally evolved to be a celebration of women and female achievements. This weekend sees Mothers Day, a very mobile feast, which of course celebrates mothers and motherhood.

Perhaps the time then is right to consider what finance has to say about women, and in particular to look at some recent research. I dont refer here to personal financial management, although this is an area where women also show distinct differences, but to ‘professional’ financial activities.

The news, gentlemen, is not good: women, qua women, exhibit traits which whether due to the subtleties of the female brain or due to culture, might well make them better financial operatives. This is not to celebrate naive housewife economics, whether the Swabian or Lincolnshire variety so beloved of Dr. Merkel and Mrs. Thatcher. There is a large and emergng body of literature on what we might call the neurophysiology of risk, and among that is the discussion on gender differences. Gillian Tett of the Financial Times has an interesting opinion piece on this.

First, we all know that boys will be boys. In finance this manifests itself as excessive overconfidence by males. Males trade more, take more risk and as a consequence tend to find that on average monies managed by males show greater volatility. Women in general take less risk and adopt a more ‘steady’ hand, avoiding excessive trading costs. This extends from trading to corporate activities, where recent evidence suggests that companies run by females engage in less risky activities, with lower merger and acquisition activities and less debt issue.

Second there have recently emerged a number of papers on women on boards. My research indicates that the appointment of women to boards is market-negative. This makes sense when you consider the earlier findings; boards more female dominated will take less risk, and recent DCU research notes that this will result in lower (short run) returns. Changing board structures to mandate more female members, something that I would wholeheartedly support, will thus have shortterm costs. In the longer term however there is recent evidence that female chief finance officers obtain loan financing that is significantly lower than the average, demonstrating that while the equity market may penalize the loan market values this tradeoff of longer-term slower sustainability for short-term returns. The market, we should recall, is both a valuation and a voting machine. Thus, negative reactions to female activities is a function of both and if there are conscious or unconscious biases (and some research suggests there are) in either by the dominant group (males) these need to be considered.

Thus we find that women in financial situations exhibit a greater aversion to taking risk than do men. This finding is not just evident from these ‘top down’ studies, but is also evident when we survey individuals. Again my own research on Irish adults is in line with international findings. Women show a greater reluctance to take financial risks and this maps to funds managed by women whether on their own behalf or for others. While this might be something valued by some kinds of funds the costs, in terms of lower volatility, to get higher return you have to accept higher volatility. Finance has now moved to the acceptance that not only does risk matter but the perception of risk by the risk taker matters. Risk and feelings about risk go together, and women tend to be more affected by (prospective or actual) risk taking than do men. Females worry more about financial activities than men

Third, research indicates that women are more selfless and less selfish than men in economic and financial transactions. Thus financial settings where ‘winner takes all’ are more likely to be attractive to and dominated by men. The testosterone driven ‘you eat what you kill’ attitude of investment banking and trading rooms is thus the natural environment of men, but of course this as we know comes at the cost of overconfidence and excessive risk taking. Boys will be boys. In more social financial situations, such as startups and venture capital situations where success is inherently to be shared, we find as we do that more balanced gender in the investing groups has a major effect. A caveat however is that this depends very significantly on social capital. While women and men may have similar levels of social capital, important in areas such as financial analysts and venture capital, women gain less from this than men. There is some evidence, quell surprise, that there is discrimination against women in the financial industry. Female fund managers, despite having almost more consistent performance than males attract lower inflows; this prejudice also follows through to ‘foreign sounding’ names it should be noted. IPOs with more female involvement tend to be looked on less favorably than those without. Women can indulge in a touch of Schadenfreude however as startups with higher degrees of gender discrimination show markedly lower survival rates., while the higher the percentage of females in first hires the greater the likelihood of success. This is of course entirely in line with the risktaking and selfish approach of men versus the more inclusive approach of women in economic activity, as startups require both drive and collaboration to get over the first few months.

The bottom line then is that if you seek shortterm gains, more males would be optimal, while for longterm consistent but per period lower returns, more female. The hare and the tortoise analogy comes to mind. The implications are clear for organizations with different time horizons such as pension funds versus trading houses, and for companies with different time horizons in terms of corporate strategy. A system which is set up and dominated by men is unlikely to be conducive to women success, unless they share the same risk attributes as do men. We need to consider that financial markets are social constructs, and that gender differences (whether innate or cultural) are likely to both impact on that and to require us to consider them when analysing or teaching around them.

Some thoughts on academic research and academic teaching

Over the last number of years the publication of the time higher education University rankings has prompted a veritable orgies of introspection amongst Irish higher education analysts and participants. Once again the news is not great, defined here as being Irish universities slumping further in the rankings. Trinity’s ranking has fallen from 76 to 117, while UCD has fallen from 94 to 159. In the listing of top 100 reputable universities Irish do not figure. Perhaps the reason is that as admitted we have adopted a policy here of trying to achieve adequacy across all rather than focus on excellence in some universities.  Spreading the cake thinly gives poor returns in most government investments.

However, it’s not really about that I want to talk. There’s an interesting article today in the Guardian by Simon Jenkins.  His basic point is that universities have become too defensive in relation to research, and too enmeshed in what he calls a “faustian pact”.  His analysis and his points are complex, and to some extent are grounded in the experience of United Kingdom, but have sent to a general discussion around what the role should be of universities in the 21^st-century. We see for example Mix, the online MIT initiative, the much-touted “success” of the Stanford course on programming, which attracted 160,000 students when it went online and which has spawned a new model of education/pedagogy, Udacity. This, along with other disruptive approaches such as that taken by the Khan Academy, or the really exciting new development by the technology provider TED, should concentrate the minds of university academics in Ireland and elsewhere as to what they are and should be doing for the 21^st-century. Should they concentrate on teaching, or on research, and how best should they position themselves to do that?

Universities exist, and have existed for hundreds of years, to do a number of things. Although we typically think of universities as giving degrees, that is by no means the sole role that they do, could, or in my opinion should, play.  Universities exist to certify acquired knowledge, via the granting of degrees; they also however exist to provide people with networks, and to provide a public good in the form of the more educated population, and via the much maligned system of tenure to provide a caste or group which should, by being immune from the threat of dismissal on foot of unpopularity of opinion, be able to hold up a mirror to society and societies actions and invite them to reflect.

Signing up for an online course from MIT may well allow you to gain knowledge. But even the best online providers are still struggling with how to effectively certify that that knowledge has been acquired by a specific person in a specific format over a specific time period. Furthermore, while online networks can be powerful, there is no substitute for face-to-face, human-to-human, interaction and discussion around shared problems and towards seeking shared solutions. People are social animals.  While there is a very superficial attraction to the idea of running only those courses which “are economic”, the reduction ad absurdum of this would be to offer only those courses which are a point in time deemed attractive to a particularly large enough group of people. This would result in an education version of the corn-hog or cobweb cycle well known to generations of introductory economics students: people flock to ‘hot’ courses, they become a glut on the market, the course becomes less valuable, it closes, the skill set wanes, and the cycle starts again.  If we wish to get the most out of our universities, via network and social good elements, then we must not only allow require that universities teach courses which, right now, might not be terribly attractive to individuals, but which lay the foundations through networks or through” education” for further societal advancement. Thus we need to cross subsidies courses and areas.

In other words, universities need to think about going back to their basics. The certification of knowledge needs to be disaggregated. Knowledge consists of a process, as well as an outcome. If I want to find somebody who has really good particular technical skills then I am more likely to find them employed by and certified by a professional organization than I am to find them straight out of an undergraduate or postgraduate degree. It is in the universities that people should learn how to think, how to acquire and internalize knowledge, as well as perhaps acquiring and demonstrating some certain specified skills, those skills should be mostly about the process. Technical, operational type, skills are perhaps best achieved by commercially focused organizations, which may or may not be attached universities, which can rapidly respond to changing industry and social needs, but which build upon a cadre of people with a proven ability to take on board complex tasks quickly.

To my mind this is where research in universities comes to play. If we consider postgraduate courses in finance, an area with which I have some understanding, the reality is that even the best Masters degrees (and this of course in Ireland is the Trinity College MSc in finance, uniquely triple accredited and chock-full of pedagogic innovation) produces graduates with a broad range of knowledge across a variety of finance and banking domains. The students are highly sought-after, but the reality is that the vast majority of them that will continue on working in the finance and banking field will obtain further vocational qualifications. These qualifications might be chartered financial analyst, accounting qualifications, qualifications around back and middle office processing, qualifications around portfolio management, in a fund administration role etc.   Like any good business school postgraduate programme the courses are taught by a combination of academic and clinical faculty. These provide complimentary but distinctly different inputs into the intellectual formation of the students. We are lucky in that we have extremely high quality, professionally qualified, industry embedded clinical faculty, who teach courses that are highly rated by the students.  For the most part however these courses are optional, in that they allow students to choose them, and they are typically focused on narrow industry facing aspects of finance. These take it as read that the students have taken the core “academic” courses taught by the faculty. It is an ideal synergy operating on using the abilities of students to learn, which hopefully they have achieved the academic faculty, and applying them to ever increasingly focused technical/full facial/industry focused courses. Of course there is no clean break, no clear blue water, no magical red line that divides these two areas, as academic faculty teach technical skills and clinical faculty teach process learning skills, but the weight of the pedagogic effort lies more on one side or the other.
In my opinion if faculty are not research active then we cannot effectively show students how knowledge in their field moves forward. One of the big issues that we addressed in my corporate finance course at the masters was what do we do if we have no risk-free rate of return. The concept of a risk-free asset has been pretty much core too much of modern finance. And for a very long time this was taken as being the appropriate local sovereign bond, perhaps adjusted if you’re in an emerging market situation. But there is a considerable body of experience, and of research, which now shows of course that perhaps even in developed markets this is not an appropriate assumption to make. If I’m not involved in research around international finance, then I’m not sure I’m best placed to address these issues. Similarly, and again in a corporate finance situation, there is a body of research, to which I have and am continuing to contribute, on how the theories of corporate finance do or do not map to small and medium enterprises. If I’m teaching investments, it’s useful, I think, that I have some experience in researching on alternative investments such as Gold, wine etc.

Research contains three elements.  Firstly you have to read an enormous and broad range.  For example, if one really in my view wants to be well up with what’s happening in modern behavioral finance you now have to be reading not just economics but also psychology, biology, and neuroscience. Secondly you have to apply the questions and skills to a question that you have posed.  This isn’t easy, as you have to find a question, or an issue, which is not already been researched to death.

Finally you have to submit your findings to some other external organization or body, and this is where many academics fail to complete the task.  Academic rejection is the norm : many top journals reject 90% or more of submissions, many conferences the same. While it is not hard to eventually get published ( but beware of the vast and growing number of ‘academic’ self publishing and vanity journals) it is hard and time consuming and frequently dispiriting to get published in a decent journal. To me being research active is not simply about during the first two, which I think most academics do and do quite well. Being research active involves closing the deal, and having the courage and conviction to submit your findings to external scrutiny. The first level of external scrutiny is to present these findings at a workshop, or ideally at an   international conference. Why international?  The reality is that in small communities there is always a danger of consensus, and to get a true critique of your work requires that you reach out beyond your comfort zone.  The advancement of research can be considered to be like the genetic evolution of a population, with too small a pool of contributors it eventually becomes inbred. Finally therefore the objective should be to publish this somewhere. Research that never sees the light of day cannot be judged. Again many academics in my experience seem content to see their research findings published in the proceedings of conferences. But there is a qualitatively significant difference between the typical rigor of peer and external review as applied to conference presentations, even if subsequently published, than there is to book chapters, and there is another leap from book chapters to even the lower tier of internationally recognized journals.

So research in universities, by the academic faculty, should in my view be seen not as something extraneous, something magical above and beyond teaching, but as an absolutely intertwined piece of what it means to be a scholar teacher. While there are superb teachers who are not research active, this is down more to the fact that they have spent decades honing their skills, as well as being possessed of the mysterious spark that makes a great teacher stand out from a good teacher.  It is in my experience and opinion better to have the majority, the great majority, of academic faculty research active, skilled in modern pedagogic issues, bringing their research to bear upon the teaching and taking from their teaching issues back into their research.

(so far 8) questions on the Fiscal Compact which I would like answered..

Following up on my blogpost today and just in time for the sunday business and talking heads shows, some questions spring to mind on the Fiscal Compact. Feel free to pose these to relevant politicians or better yet to answer them below..

1. How would the existence of the fiscal compact have prevented the Irish economic collapse, given that we would (debt levels apart) have been pretty much within the terms of the criteria? Our problem on the fiscal side was that we were badly balanced in terms of the makeup of the tax base and clientilist in our expenditure.
2. How exactly will a structural deficit be estimated, given that there is no consistent method for so doing and that it is dependent on in essence a backcast of what the economy might have been at were it growing at capacity? What models and approved by whom will be used to estimate the economic dynamics? What if the ESRI say we are in balance, the ECB say we are not, the OECD say maybe, and the IMF say we might be if their model is right…? Who arbitrates..?
3. Given that the implied dynamics of the fiscal compact on sovereign debt are that it will radically shrink, what are the knockon effects and how will they be handled in terms of pension and investment funds which will now have to either move to other low risk assets with the danfer of igniting bubbles therein or take more risk with the consequent dangers to pension funding (private and public).?
4. Would the existence of the FC have prevented the taking on of the bank debts, in 2008, given the effect which that had on the fiscal side? If this is so how can the FC be squared with the evident desire by the ECB to not see banks fail?
5.  Given that if you exceed the terms of the Fiscal Compact you will be fined up to 0.1% GDP, will that not lead to a exceeding-fine-exceeding spiral?
6. Given that in general Fiscal policy is taken as the taxation and expenditure elements of government as they interact with the economy, and that this is in essence a state level spending side only treaty, when can we expect common movement on either state level taxation or community level transfer payments to offset the pro cyclicality of this pact ?
7. If this is ‘a vote on the euro’ what mechanism wil be used to remove us from the euro zone? What treaty, what section?
8. Given that the government have already stated that the talk of a second bailout (aka being in the ESM) is ‘ludicrous’, and that the only sanction mentioned in the FC is not being able to access same ESM if one does not sign up, what is the downside of saying ‘hmm, no, not quite what we need thanks’?

The fiscal compact: maybe inevitable, hardly sensible

This is an extended version of a column published in the Irish Examiner, Saturday 4 Feb 2012. http://www.examiner.ie/business/business-features/with-our-fiscal-policies-is-the-compact-right-for-ireland-182591.html

The fiscal compact that we have now seen agreed to, the Not Quite an EU treaty as it has been termed, is a curates egg. At one level, like mom, apple pie, puppies and sunshine, its hard to disagree with the lofty notion aspired to, the notion of government finances being run in a coherent, sensible sustainable fashion. But, like the curates egg, it is good and bad. The bad elements to my mind outweigh the good and for that reason, at this stage, it is not at all clear to me that we should take it on board. The government had an opportunity to take on board a (soft) fiscal compact in the form of a private members bill tabled by Senator Sean Barret which would have addressed many of the concerns of the proposed compact without the hard numeric targets. That they did not kill the bill is testimony to the sense of such a rule being required, but that they did not progress the bill shows that there is no urgent will absent threats and cajoling. Had the barrett bill been progressed it would have strengthened the governments hand in that they could have gone to the treaty meetings with a fiscal rule in hand, and which might then have been able to be used as the basis for discussion.

The basic issue that the compact addresses is that all signatory powers must have a binding rule on how much government debt they are allowed to have, and if this is too much (defined as more than 60% of GDP) they will have to reduce it at a rate of 5% of the balance per annum, and to maintain a balanced or surplus budget. This is not sensible economics. It rules out any countercyclical government spending at least until the 60% balance is reached. To a great extent this is the same as the stability and growth pact, whose terms were breached early and often by Germany and France, now insisting that the rest of Europe swallow the medicine they themselves have persistently rejected without demur or sanction.

The basis of modern economic thinking (since 1930) is that governments should in principle be allowed to engage in countercyclical spending, increasing the relative size of government in bad times and shrinking it in good. In effect however this compact is the obverse of the rightly derided McCreevyism of ‘when I have it I spend it’ and takes economic policy back to the early 1920s. That worked well…

Some argue that the terms of the compact are essentially those that we agreed to under the Maastricht treaty and its attendant stability pact. The main difference here with the stability pact is the speed of adjustment which would imply that Ireland would face up to 20 years of austerity followed by an indefinite period of being unable to borrow regardless of fire flood or famine , and the threat. Instead of carrot and stick it is stick and stickier…The threat is that countries that do not adhere to the terms of the compact will not be able to access further aid from Europe after 2013. This of course should not be a problem for Ireland, if we believe the statements coming out of Merrion Street, as we plan to be back borrowing from the markets and thus will not need a second bailout. In fact, Minister Noonan has stated that it is ‘ludicrous’ to suggest otherwise.

Europe as a whole is significantly over the 60% limit. As of 2010 eurostat figures the majority of individual countries are also over. Thus the adoption of the compact suggests a prolonged massive de leveraging of the European sovereign bond market. The euro 17 countries as a whole need to reduce from 85% to 60%. At present terms that is a reduction of some 2.3 trillion euro. That is a massive fiscal drag to pose on Europe. And it will do nothing for growth, rather the opposite.

A further problem with the compact is that if it succeeds it will gravely damage the sovereign bond market. A large (but not overwhelming) stock and flow of relatively low risk assets are required to support pension and investment funds. A shrunken market will be less able to fulfil that role. The fiscal compact states a maximum permissible deficit of 0.5% of GDP. It is easy to work out that with modest growth of say 3% then the deficit rule will result in a long term debt to GDP ratio of below 20%. The fiscal compact therefore requires that over time trillions of euro of assets are removed from consideration of investors. The consequence of this will be an intensified move to safe have assets such as the (to be radically shrunken) German bund market , driving down further German interest rates. Investors will have to accept radically lower long term returns. Alternative investment classes seen as safe havens such as gold, or denominated in currencies such as the Norwegian kroner or Swiss franc will also attract investors, with knockon consequences,

The audi adverts from the 1980’s had the tagline “Vorsprung durch Technik“, or competitive edge gained via technology. This treaty should have the tagline “Vorsprung durch Sparmaßnahmen (vielleicht), or progress through austerity, maybe….There is little doubt that Germany has done very well out of the Euro. The german economic model is one where there are relatively low and stable wages and prices, enabling German companies to maintain their production and prices , the rest of the world becoming more or less competitive around them. German exports to the eruo area stand at approx. 40% of their total exports. This has fluctuated surprisingly little over the last decade. It is not credible but appears to be what we see emerging from Germany that they can wish to have a model whereby the rest of the euro area comits itself to ongoing (and perhaps fruitless ) austerity while simultaneously continuing to buy miele washing machines, BMW’s and so on. What is good for the Eurozone as a whole is good for Germany. But this message, if it is being put across in Germany, is not being made clear.
Ireland is only now beginning to really come to grips with the twin financial problems of the banks and the budget deficit. The drag that the banks will have on the state for the next decade is the role which the Anglo Irish bank promissory notes will play. In essence, to ensure that the exceptional liquidity granted to Anglo via its swapping the promissory notes does not become a permanent increase in money, the Central Bank, acting at the behest of the ECB, is requiring the repayment of same. This amounts to €3.1b per annum for the next decade. The ECB rationale is that if they do not do this here then it will set a bad precedent and could result in money supply increasing and this might, eventually, result in inflation. European inflation now is c 3% per annum. Hyperinflation, which destroyed the economy of Weimar Germany and is alleged as a proximate cause of the rise of Nazi Germany, is generally defined as being rates of c 50% per month. The scarring effects of the Weimar experience still scare the Bundesbank and its successor the ECB. But we are literally orders of magnitude away from this problem. In order to prevent the possibility of hyperinflation in Europe, the Irish taxpayer must engage in a money burning exercise. And we must now, under threat of being cut off from funds, engage in a more rapid deflation of the system than would be deemed optimal. We are being asked to pile austerity on absurdity. At the very minimum the state must seek the removal, in toto, of the Anglo promissory note burden. Then and only then can we see where the true trajectory of Irish fiscal policy might be found, and then and only then can we see if the Fiscal Compact makes sense for Ireland.

Banking : Back to the Future – presentation to the Crisis Conference

For those that were unable to make the crisis conference held today in Croke Park, please see below my slides on a possible future for banking. Note that these are suggestions and ideas : not detailed policy proposals. Theres only so much one can say in 25 minutes….

The slides re PDF and about 4mb in size as uploaded : click below then click again…

Banking slides : crisis Conference 25 Jan 2012

Down the Memory Hole: why we should give more priority to economic and financial history

A few months ago I found myself teaching third-year students for about one hour on the historical experience of stocks and bonds in relation to the risk/return characteristics. I’m sure most people who have taught finance will have come across these phenomena, where one finds oneself referring to a for the students historical but in ones own case very pertinent event, in my case the 1987 crash, and looking up realizing that this is so far beyond the life abd professional experience of the students that you may as well be talking about the reforms of the Roman bureaucracy by the Emperor Titus.

We know that people generally speaking tend to engage in what financial economists call “hyperbolic discounting”, which applies both to the past as well as the future, resulting in a shorter term perception, giving greater weight, greater than would be appropriate given the distribution of outcomes, to more recent events. This also manifests itself in a number of other financial and behavioral biases. The bottom line is that there is always a tendency for people to consider that this time really is something new. And of course, this flies in the face of what we know from history. Probably the best book on economics and finance over last couple of years has been the book by Reinhard / Rogoff ” this time is different”, credit should know, it’s almost certainly not. In my view this book should be compulsory reading for anybody who thinks about being involved in financial and economic markets at any level. In my case the 1987 crash was memorable, of course as a major event in finance, and also because on that Monday I started work on the Central bank of Ireland.

This memory, and the realization that for many students, and don’t forget them in a couple of years these students will be the ones that will be managing your money, and knowledge of financial, business, or even economic history, is lacking. Earlier this year a study was undertaken by the St Paul’s Institute, which looked at the economic and financial historical knowledge of London finance professionals. The full study, available here, is a fascinating read about the attitudes of finance professionals in the city of London around the areas of ethics and integrity. What was reported widely, see for example an interesting report here, was a city professionals exhibited a profound lack of knowledge around the economic and financial history of the own profession. Quoting from the London Independent

In an indication that memories fade fast within the banking sector, less than a third of employees were able to pin point 1980 and 1991/92 as the last two dates major recessions took place in the UK. In contrast, more than three-quarters of respondents correctly answered that the post-credit crunch recession began in 2008.

Equally, almost seven in 10 people had no idea that this year is the 25th anniversary of the “Big Bang”, the major deregulation of Britain’s banking industry that allowed London to become the financial capital of the world – and an inevitable epicentre of the ongoing economic turmoil.

To me this is profoundly worrying. The words of George Orwell are very apt: he who controls the past controls the future. And it’s not just me that worried…the CFA Institute, the professional body that certifies and regulates the “front office” portfolio and institutional managers, is reported today in in the financial Times as also being concerned. The report is behind the financial Times registration barrier, registration is free, and provides limited access to a number of articles per month. Nonetheless, some quotes from it are illustrative.

CFA UK, which represents 9,000 investment professionals, argues that the study of financial history should form a major part of all compulsory education for retail and wholesale investment professionals. “Financial amnesia disarms individuals, the market and the regulator,” the body said. “It causes risk to be mispriced, bubbles to develop and crises to break.”

The education requirements for investment professionals in the UK do not oblige them to have “any understanding of financial history”, added Will Goodhart, chief executive of CFA UK. While the UK’s Financial Services Authority sets the framework for the Investment Management Certificate, the country’s most widely recognised qualification for investment professionals, CFA UK sets the questions. Mr Goodhart suggested that about 15 per cent of the syllabus focus on financial history.

The British CFA programme should be reformed to include “a practical history of financial markets, designed to remind us about the effects of liquidity, psychology and regulatory failure”, the report said.

It also advised the boards of financial institutions to undertake an annual “amnesia check”. “It would be reassuring to know that once a year the board of a financial services firm had reminded itself that this time it is not different,” Mr Goodhart said. The

The CFA Institute have a relationship with the number, about 100, universities where they provide input into Masters level degrees in finance The idea here is that the Masters in finance cover much of the ground of the professional qualifications of the CFA Institute, although no exemptions are given, and that they therefore provide both an academically rigorous as well as industry focused experience for students. Trinity College Dublin and University College Dublin are the only two such universities in Ireland which have courses so aligned. The MSc in finance in Trinity College, and the MBS in finance in UCD are the relevant courses. It’s instructive to note that examining the syllabi for these courses there appears to be no opportunity for students to study financial history. I should note that the initial design of the MSc in finance and Trinity College was mine, and therefore I should take some responsibility for not having included as an optional module, ab initio, a module on financial and economic history. In my defense I can note that there was a proposal the following year have such a module, but it was not felt that there would be sufficient numbers of students interested to warrant offering the course. And, the sad fact is, that this is probably the case. Students who have never been exposed to history are not likely to have an inherent appreciation of the importance of history.

What about other courses? I am the external examiner for the Masters in financial economics at University College Cork, and it is an excellent course of course, but it does not have a module on financial history. The University of Limerick offer a wonderful degree at Masters level in computational finance, the Masters In finance and capital markets in Dublin city University has been on the go for a number of decades and again provides excellent training, and there is a recently developed masters in financial engineering at NUIM. None of these, insofar as I can see from examining the course lists online, offer students a module in financial history.

it doesn’t seem to be any better in economics. The TCD masters in economics does not appear to have a module available on financial or economic history; nor does the largest masters in economics degree course, that run by UCD. This also seems to be the case in NUIM, and in Cork.

What about MBA degrees? If our financial and economic professionals were not been trained in a manner, which incorporates as a formal module and understanding of history perhaps, business masters of the universe are so being taught? Again from my knowledge there is no such module on the MBA Trinity , nor on the MBA offered in UCD, despite it being the only MBA in Ireland which is “triple accredited” and the only MBA in Ireland ranked in the Financial Times rankings. In fact the only mention of history on the UCD MBA site appears to be in the promotional brochure outlining the history of Dublin.

I haven’t looked at the situation in UK, USA. That would be an interesting master’s thesis, for a student to examine attitudes and approaches to the incorporation of financial and economic history into graduate professional training programs. But I am pretty certain that situation which I have described here in Ireland is representative of the vast majority of courses. The teaching of economic and financial history has never been a core strength, particularly in Ireland, of business schools. Even within economics departments economic history, still less the history of economic thought, has tended to be a very minority sport. Ireland in recent years has been blessed in having exceptionally talented economic historians, such as Kevin O’Rourke in TCD, and Morgan Kelly and Cormac O’Grada in UCD . Kevin has now left Trinity College, has taken a professorship at All Souls College Oxford; Cormac has retired; Morgan showed in his analysis of the economic crisis the benefits which a good grounding in historical concepts can provide.

The reality is that as people move and retire they are unlikely to be replaced, certainly not the same levels, and given that it takes decades of dedicated skill to achieve the levels of knowledge then certainly not at the same level, ab initio, in terms of intellectual firepower. Yet, who can doubt that a greater knowledge of history would be useful? Who can doubt that were people, particularly those entrusted with our financial and economic well-being, more aware of the cycles of the economy and of the markets, that they would be at least better armed in relation to realizing that this time is not different, and that by observing and learning from the past we can at least not be excused the knowledge that “we never knew this could happen”. Of course, there are no smart green nano bots, no patents, and very few high-tech spin-offs that come from providing economic and financial history courses. And therefore, given the dreadful trudge towards turning universities into some form of annex to an ill-defined “Smart economy” we will continue to churn out highly technically skilled economic and financial graduates whose only exposure to economic and financial history has come about through individual course leaders dropping nuggets of information into their courses, or for the select few more so motivated, from their own autodidactic endeavors. And that is one way to ensure that we have a dumb economy and one that is doomed to prove Santayana right : Those who cannot remember the past are condemned to repeat it.