Monthly Archives: October 2012

Economics in crisis?

This is a column published in the Irish examiner 27/October 2012
Economics is in crisis. We know that this is the case because many have said so. Even such personages as the queen of England, who famously is so divorced from the hurly burly as to not carry a purse, has asked why economics didn’t see the crash coming. Economics is in crisis….except where its not.

Economics is not a discipline – nor is it a profession. It is instead a way of thinking. In its best manifestations modern economics shows its roots as an outgrowth of the philosophical wing of the Scottish enlightenment. In its worst this thinking has become more in common with the Taliban, with dogma and assertion replacing argument and evidence.

When people say economics is in crisis and it didn’t predict the crisis they typically point the finger at one or two subsectors. Macroeconomic theory and financial modeling tend to be hauled, rightly, over the coals, and their deficiencies exposed. In the case of macro theory the argument is that in treating finance and the financial sector as a residual, frictional, element in an otherwise beautiful model the theory could not account for the stresses that built up and eventually blew the model and the modeling, the symbol and the referent, apart. In addition, the economics profession underwent, especially in macroeconomics, a revolution in how people thought, with the Keynesian story of what happens in the relationships between aggregate demand, unemployment and money being lost to many. In finance, in particular in some parts of finance theory, a subliminal belief in some form of market efficiency and its consequences, prevailed. Both macro theory and finance modeling became more and more mathematically sophisticated but in the absence of an understanding again that limited models and a lack of the ability to model people in small groups interacting to many these models ultimately failed.

So economics is not immune from criticism. However, and perhaps for the best, we do not have economists making decisions on economic policy. That is and must remain the democratic prerogative of government. Where economics failed was mostly in communicating to policy makers that their policy prescriptions were the outcome of models, that these models were imperfect, that they were of necessity based on particular assumptions and that they were in essence guides. They were guilty perhaps of overselling the outcomes as oracles, but not Delphic ones.

And yet, these areas are neither the sole nor even the largest areas of economic endeavor. The most widely used classification system for economics is that of the Journal of Economic Literature. It allows papers to be classified into 20 broad and a host of sub categories. Macro and monetary economics are one and financial economics another. If we examine where research is at now by looking at the papers published in 2011 and 2010 in the American Economic Review (the most prestigious general journal in the field) we note that it is microeconomics (over 20%) and Industrial Organization (9%) and Labour Economics (8%) that are most investigated (assuming that papers are published in proportion to the extent to which they are written). Economic Development is almost as much published as Macro or Finance. Economists are researching and publishing on areas that impact directly on people. We live in the micro economy and it is our aggregate activity which makes the macro economy.

There are lessons here for Ireland. There are large swathes of economic activity and research output, beyond macro finance research, that bear directly on government policy. We have excellent research in labour, health, education, behavioral economics, international trade, which do not shout their results. But a careful reading of these would suggest that in particular where the results are congruent with other fields and other countries, the government and commentators might wish to take note. We have evidence on how there is vast return on early childhood education , yet we are cutting same. We have evidence on the importance for policy making of a pool of behavioural economists, but the universities are losing world class exemplars of same; we have a health care system where there are inbuilt and self reinforcing conflicts of interest but no urgency in remedying same; we have research aplenty on the need for coordinated spatio-economic planning, but little evidence that such exists. We could go on….

Economics is a way of viewing the world. Macroeconomics in particular used to be called political economy, recognizing that at the end it is the politicians that will take decisions. Where modern macro can be faulted most in my view is that it has at one and the same time taken its eye off the political and simultaneously got into bed with politicians. Some macro theorists ignored the propensity of politicians to hear what they wish to hear; others became spokespersons for particular economic ideologies and left behind their critical thinking. But then, the same can be said for many other areas of human endeavor. Nor are the media blameless . In Ireland we persist in having presented as unbiased in the media the views of persons employed to undertake economic analysis for banks, unions and employer groups.

Perhaps the best we can hope for is that we see an expansion of the initiative to have declarations of financial support noted. Perhaps an expansion to include whether someone had ever been a member of a political party, or undertook paid consultancy for a body would help clarity in understanding.

No Deal on Legacy Debt? Ok… a modest proposal for future debt.

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So we have / have not a deal on legacy debt but do have a deal on the ESM recapitalizing (prospective) losses in the banks. I think.

Merge NAMA with IBRC. Fling in all mortgage debt at 50% off. Credit cards, home release, every sort of debt drag on the state or any economic entity therein at a massive discount.  Commercial loans, charities overdrafts, loans fellahs took out for motorbikes,  sod it, lend me money to buy  100b of state  debt at 1c and then throw that in.

Let the ESM recapitalize that while we enjoy the debt jubilee 🙂 They can enjoy the 100% ownership of IBRCNAMAQUINN Ltd. And long may they prosper.

(above proposal may contain elements of tongue in cheek, exasperation and fantasy. But then again it might not)

17% of NAMA sold to British company formed just 17 months ago

we sold NAMA…well, 17% of it. No, we dont know the price

NAMA Wine Lake

Well there was speculation going around Dublin on Friday afternoon about it, but this morning NAMA has confirmed in a press release – available from their representatives, Gordon MRM here – that the 17% stake that had been owned by Irish Life and Permanent has been sold to a British concern called Walbrook Partners LLP, a company formed in May 2011 by Michael Keeley, Geoffrey Broomhead and Simon Haworth.

You might recall that Eurostat, the EU’s statistics agency which has the final say on the calculation of countries’ national debt said earlier this year that the 17% stake in NAMA owned by ILP was causing it concern since the State now owns 99.5% of Permanent TSB and all of Irish Life, and as a consequence the State was majority investor in NAMA so the NAMA bonds might have to come onto the national balance sheet. The sale of the ILP…

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After Merkel…Ireland’s unpalatable choices

So, it seems now that Dr Merkel backs the idea that no, there should be no retrospective debt deal. Where does that leave us?

We have invested 20+ billion into the pillar banks (or another word starting with P and ending in X as a noted economist of many years standing is wont to call them). This is valued at 8b in the NTMA, and consists of the ownership of AIB, ILP and a chunk of BOI.

The ESM it is now clear will only deal with new claims. Therefore we will not get this back. Even if we did, in the context of a gross government debt of  170b, its a drop in the ocean. Even the whole 20b would not be meaningful. We face debt/GDP levels of 120% in the near future and when we measure against the taxable GNP we are heading towards hellenic hellish numbers of 150% plus

We have 28b in the wretched promissory notes. These are as flammable as petrol soaked crepe paper but the government refuses to consider setting match to them. And so they advance into the budget with 3.1b (6w tax take) in the hole of nonvoted captial spending, aka money to Anglo to give to the Central Bank which will destroy it.

History tells us that countries with unrepayable debts restructure, default outright, fiscally repress or let inflation do the dirty work. Where we now stand the latter is not possible with the BundesHawks at the ECB vigilant against weimarian excesses; repression takes time; default is a last resort. So we need to restructure. The only choice is what and how. The only stuff we can  restructure is the ProNote. Id restructure it to zero. Talking to politicians they are obsessed with the 3.1b- this is a liquidity issue. Unless we get the entirety of the Pronotes removed we are in deadly danger. Even with them gone we still labour under a massive burden of debt.

Unpalatable choices abound.

Irish junior finance minister says national debt is unsustainable

Is our debt unsustainable? One Irish minister for finance thinks so….

NAMA Wine Lake

As someone who has watched in frustration as both our Minister for Finance Michael Noonan and Department of Finance have consistently maintained that our debt:GDP % is “sustainable” on the basis that it will eventually come down, it came as a welcome, though surprising, relief last night to hear Brian Hayes, junior minister for finance at Brendan Howlin’s Department of Public Expenditure and Reform, say that the debt was “unsustainable”.  Minister Hayes was speaking on RTE’s Prime Time current affairs programme and his statement was a bald “our debt is not sustainable” This contrasts with, for example, the view of the Department of Finance which in May 2012 produced a document “The Irish Economy in Perspective” from which the graph above is extracted, along with the official view that our debt was “sustainable”

To me, this was a “game changer” of “seismic” proportions, because up to now, the official line…

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Danish Mortgages in Ireland? No thanks

Senator Sean Barrett introduced a bill into the Senate this week to in effect restructure the Irish mortgage market along Danish (aka rational) lines. Stephen Kinsella on IrishEconomy has a post on it where he notes that the Minister nixd the bill on essentially four grounds

1. We are not, nor were we ever, Denmark.

2. Changing wholesale to this system has risks, most of which I won’t go into here, but the Danes give defaulting households 6 months and we’d really like that to be longer, say a year.

3. Changing to this system would imply loans at 80% LTV, most banks are at 92% LTV, this would make it more difficult for first time buyers.

4. We’re in the middle of negotiations on the various capital requirements directives, this could throw a spanner in the works with the EU.

The debate, which was quite good, is reported here. Note that Constantin G and myself in February mused at the Croke Park Conference that something along these lines was desirable. Its interesting that the system can take in good ideas but not it seems accept them.

Here is

 

IBEC and IBRC and the IMF

This is a version of a column published in the Irish Examiner

It must be dangerous to be a bird in Dublin these days. The government that promised transparency has instead adopted a kite-flying approach. The kites pop up, and like modern day Benjamin Franklins the government minister hangs on as it drifts into the storm, and then gauges the lightening. Occasionally they get singed, sometimes they escape, and withdraw for another day. And its not just the government. Every other aspect of social partnership is busy with economic bals and fiscal paper and silk, constructing and testing kites. In the best Japanese tradition, and as we are heading towards a Japanese style lost decade why not, we even see kite wars. Some kites are saw edged and designed to cut down others. Some kites get smashed down and then amended get relaunched.

 

IBEC have joined in this pleasant pastime recently, with their proposal that public sector increments be paused. The saving from this would be approximately 1b per annum it appears. The problem with such increments is that they are generally paid regardless – one is on a salary scale along which one advances by dint of survival. In a modern managerial environment that doesn’t make a lot of sense – there is little incentive to excel, and little disincentive to slack. Of course, we have know this for decades and for a long time it suited IBEC as a member of social partnership to allow this to go on. Peace at any price was the seeming mantra. Cutting a billion euro from the state budget is eminently justifiable in the context of borrowing a billion. However, throughout the crisis the argument on cutting public sector wages has been notable for a lamentable lack of follow on argument. Cutting X does not save X. At the most basic it saves less than X due to the fact that yes, public sector wages are subject to tax. So 0.7X might be the after tax savings. And then there is the knock-on effect…

 

we have seen recent estimation from the IMF of these effects. In economics the effect of changing one item on another is known as a multiplier. The assumed and conventional multiplier for government expenditure was in the region of 0.5-0.7. This would imply that cutting X would in the end result in a fall in overall economic output of 0.5 – 0.7X. In other words, cutting wages would not have the overall effect of reducing the economic cake by the same amount as the wage cut. This may now need to be revisited in the light of the IMF world economic outlook report which suggested that far from being less than 1 (implying that cutting public sector pay would result in a small fall in output) these shortterm multipliers may be significantly greater than 1. In other words, cutting X will result in a decline of 1.5 X– 1.9X .

 

Whatever the attraction from a government accounting perspective of cutting the short and medium term effects on the rest of the economy would be significant and negative. In the Irish case the effects are complicated by the GNP/GDP issue – while GDP can be growing or contracting slowly the GNP component can be falling more rapidly. Thus we cannot say with confidence that based on the IMF analysis the multiplier is too small we can take it that some very significant work on same needs to be done, pronto, by a combined ESRI-DFinance-C Bank team to ascertain the best evidence. In that context, we might want to hold fire on accelerating the pace of consolidation

 

IBEC have not, to my knowledge, come up with a comprehensive set of implementable performance metrics – that to be fair is not their job – but one must applaud their desire to save a billion. However, why stop at a billion? Why not save three times that much, and harm nobody? Part of the problem with cutting government expenditure is that it gets recycled into the economy. It is rare to have government expenditure which is totally isolated from the economy, and yet we have such.

Each year the government spends 3.1b feeding the IBRC (anglo/inbs) black hole. This year in a cunning plan instead of real money they issued a bond to the beast. The borrowed or tax derived money, you will recall, is given to the Central Bank of Ireland who then destroy it. As far as I can ascertain IBEC have not expressed concern about that, except in so far as the technicalities of the bond v cash 2012 payment impacted on government aggregates. It is abundantly clear that there is little appetite in the ECB for a deal on this money. At the very best we might replace this promissory note (which is not government debt) with a 40y bond. At worst we will be stuck with the full repayment schedule. It would cause nothing but the closure of IBRC and a technical temporary accounting headache for the Central Bank if the government were to announce that in framing the 2013 budget they were not going to make the March 2013 (or any subsequent payment). The ECB would be unhappy but I guess we can live with that. What they would not be able to do is to “cut us off” from liquidity. It would be nice if IBEC were to advocate saving 3.1b but then again IBRC is a member firm of IBEC. This money does not get spent in the Irish or European economies. It vanishes. We borrow it, and we destroy it. Why not…not borrow it.?