Monthly Archives: January 2014

What do Irish economists think and teach?

EconomistsSavingTheWorld

In late 2013, Stephen Kinsella and I undertook a survey of Irish economics and finance academics. We asked a bunch of questions on what they felt was core and not in the subject, on how things had changed in teaching over the last 5 years, on their views on the subject etc.  We are writing this up as  a paper with additional commentary and some suggestions on how to improve things but in the meantime we are presenting it at a conference organized by the Irish Economics Association on Friday 31 Jan 2014. (Update : Stephen has unavoidable work commitments and I have unavoidable personal/family commitments that make it impossible for us to attend. Hope this blogpost fills the gap partially)

Here are slides on this presentation. Here is a powerpoint show with my narration – this is quite large ( ±100 mb) so be warned – but it gives a much better sense of how we feel than just the raw slides alone. This is my take. Others, including Stephen, might not agree with any or all interpretation, so please recall that.

What’s the takeaway?

  • We surveyed 300+ academics and got a fairly poor response. It was surprising how little people seemed to care about the profession. We unashamedly concentrated on university and macro/finance. We couldnt be sure of a full sample in IoTs. And we want to first see what the academics think before maybe moving onto the industrial.
  • Modal respondent is 10y plus in academia, has a PhD doesnt have a professional training.
  • only 11% are teaching in an area v close to their research – research led teaching seems a long way off
  • average undergrad contact time is 57% of total teaching.
  • Most economists think the government should put more money into economics education …mmmkaaay
  • Despite the preponderance of evidence, the respondents dont think that studying economics makes you more selfish
  • They firmly think its a science (three words – Prescott, Sims, Nobel…)
  • Respondents want a broader focus in economics teaching BUT also want more math and DONT want it taught as part of management or social sciences. Greetings from Isolation Hill.
  • There is no sense that the profession should sort out its internal disagreements on fundamental issues (and these are many and stark) before speaking out.
  • Theres a very traditional skills led view of what should constitute the core. Amazingly only 33% think that a survey of irish economic conditions should be in the core.
  • Theres a deep suspicion of accounting. Which is worrying as its the language of business. Most graduates wont go indon’tesearch but become part of the business workforce. Despite this there’s a feeling that SME finance is important. This is not logical.
  • Most come across as technological illiterates. While there is considerable use of anti-plagiarism software there is much much less use of even things like interactive clickers (or apps for same), or the use of social media for engagement.
  • compared to 5 years ago
    • more time is being given to labour market issues, to debt dynamics and to DSGE. The latter is worrying as these are in essence (and imho) useless. See the  series of takedowns by Noah Smith (search for DSGE). We also spend more time on the microstructure of financial markets, on models of bubbles and networks, and on the role of financial institutions. More time is spent on expansionary fiscal contraction, hopefully debunking its existence (but I wouldn’t be too sure) . That old trope of the Regan era, Trickle Down Economics, gets more time, as does privatisation and endogenous growth. If I had to call it, I would suggest that finance teaching has taken more cognizance of the crisis than has mainstream macro teaching in Ireland.
    • Less time is being spent on very little. Keynesian Cross models – this is interesting as an implication of the KC model is that there can be a  equilibrium with less than full employment and with recession – that might be a useful idea to implant in peoples minds, no? Maybe its seen as dangerous.
    • For the most part people teach the same , more or less, than they did 5 years ago. Despite the massive wrench in the actual economy, the academy seems to be broadly unchanged in how and what it teaches. This must change.

Bitcoin and “the denationalization of money”

Bitcoin is in the news again with the Winklevoss Twins testimonies and the indictment of some persons involved in a Bitcoin exchange.

There has been surprisingly little research on Bitcoin from academics. Partially this may reflect a disinterest, or a lack of knowledge of how it works, or a dismissive attitude towards it as ‘faddish’. That said, Bitcoin seems to be staying the course so far, and it would not be surprising to see more serious academic research emerging. It seems an ideal focus for monetary theorists. Here – Economics of Bitcoin – is one paper by Gerard Dwyer,  a very well respected economist (who also worked as a senior central banker).

It concludes very favourably for Bitcoin – “The design of Bitcoin and similar currencies does not have any inherent flaw

 

Special Issue of IRFA on Gold

Gold-Bars-in-Fort-Knox

IRFA Special Issue on Gold

There has, in the last decade,  been a remarkable resurgence in interest in gold as an asset class. The rise and fall of the gold price, questions of gold bubbles, the comparisons of the Euro to a new gold standard, the growth of China as a gold consumer, and the increased growth of gold related products have prompted significant numbers of academic papers on this metal. In this regard it seems timely to put together a set of papers that reflect the state of the art on the financial economics of Gold

Papers are therefore invited for a special issue on International Review of Financial Analysis  on Gold. Papers should be submitted via the elsevier EES system  by 1 September 2014. The Special Issue will be edited by Professor Brian Lucey, Editor in Chief, Professor Jonathan Batten, Special Issues Editor and Professor Dirk Baur, Associate Editor.

Papers should address the financial economics or econometrics of gold, gold derivatives, the gold market, the relationship of gold to other assets, the role of gold mining stocks, the microstructure of the gold market, forecasting of gold, the monetary role of gold and the role of gold as an investment asset. We welcome both theoretical and empirical approaches.

All papers accepted will, prior to publication, be required to be accompanied by a video abstract or audioslide (see http://www.elsevier.com/about/content-innovation/audioslides-author-presentations-for-journal-articles / or  http://www.elsevier.com/about/content-innovation/author-videos )

Papers should be submitted via http://ees.elsevier.com/finana/, selecting Gold Special Issue as article type. Please note that the standard submission fee remains in place for this special issue. We reserve the right to accept papers but to place them in regular issues of IRFA as opposed to the Special Issue.

Please feel free to contact any of the special issue authors if you wish to discuss the suitability of a paper for the special issue.

Does An Irish Solution loom for European Banks (one way or the other) ?

brokenbankThis is a version of my column in the Irish Examiner of 25 Jan 2014 .Europe’s banks are broken. Very broken. We have always suspected that, but recent evidence in indications suggest that nearly six after the crisis first began to manifest itself seriously they are still grossly impaired. The drive towards meaningful banking union has stalled again amidst squabbling about whether or not there should be and if so how much of a common pot for resolution.  German banking giant Deutsche unveiled a billion euro loss just this week, underscoring how fragile both the banking system and the economy remain, even at the core. Without a working banking system the economy cannot prosper.

Recall what it is that banks do – despite the mystique and the bluster, its actually pretty simple. Some people have money and others need it. Banks act as a middleman to facilitate those that want it to get it from those that have it, in return for them taking a cut of the interest charged. This can be across space (savings flow from region to region) and/or time (mortgages and longer term loans) . Lending money out is risky. That is why banks charge an interest rate on loans that is greater than that which they pay on deposits – apart from needing to make a profit and cover costs, they need to put some money aside for the inevitable defaults and bad loans.  These retained profits, plus some other ‘safe’ assets, are the banks reserves, or its capital

There is a persistent fallacy that banks lend out reserves. They don’t. People such as Frances Coppola have been banging on about this fallacy for some time now (see here and here)  Its more complicated than that and revolves around the fact that banks can create credit (money) by issuing loans. However,  banks  do need, under prudential regulation, to hold a certain amount of capital, a proportion of the assets they have (loans made).  If banks have more capital they are in a position to expand. The problem for  European banks is that they are stymied by the fact that they have written down bad loans to an extent sufficient to impair their capital base but by no means enough to clean their balance sheet of the these bad loans. Caught in a double bind, they are unable to efficiently do their job as intermediaries and as credit creators.

As part of the ongoing efforts to get to the root of the problem the ECB have initiated an asset quality review. This is in effect yet another stress test. Previous not-terribly-stressful tests have been greeted with derision as they in effect claimed that all was well when it was manifestly not. Thus this stress test, to be credible, needs to fail some banks – any banks.  It is reminiscent of Admiral Byng, who was shot not for failing at his task of taking Minorca, more or less impregnable and a rock on which others had foundered, but ‘pour encourage les autres’.  European banks all stand in danger of being the financial Admiral Byng of 2014. One or more large banks needs to fail to show the virility of the tests.

Recent research has looked at what holes might be lurking in the capital. As has been the case throughout this crisis while high level public data cannot give a precise amount it has been remarkable how using such data the gross magnitude and nature of the money sink de jure has been accurately estimated. Looking at the 109 largest banks with €22 tr in assets a hole of between 5b and 66b is found even assuming no further deterioration of any assets – an unstressed situation.  The biggest holes are in the core – French and German banks and the smallest in the periphery. Ireland, if things don’t get any worse, does not need any more capital in its banks.

But what if things do go south? They stress the banks rerunning a severe financial crisis, and further suggest that any residual bad loans are written off. Writing off bad loans of capital weak banks is the only way to kill zombie banks who crowd out and hinder the banking system.  In this stress situation the banks are woeful. Assuming reasonable levels of reserves to be held, European banks may need between 500b and 750b. Again the worst holes are in the core banks  especially French German and Belgian banks. Top of the list are the giant french banks – Credit Agricole, BNP and SocGen, and Deutsche Bank. Bank of Ireland and AIB are not immune, possibly requiring 6-13b euro more. But sure were good for that, havent we turned the corner and exited the bailout to a land of green shoots…

So what to do? Senior bondholders are sacrosanct and while depositors of unimportant nations such as Cyrus (whose banks are still bunched beyond reasonable hope of redemption) might be bailed-in that wont happen to real depositors, those of the core. So banks will limp along. But there is a potential solution – promissory notes. The notes were created to shore up the capital base of Anglo Irish Bank, and allowed it to access liquidity from the Central Bank of Ireland. Which it did. Ok, Anglo was a hopeless case but the principle is good. The problem with the notes was not per se their existence  – it was that they were required to be extinguished over a fairly swift timetable, placing unbearable strain on an already  strained exchequer and that it was done to put a figleaf on the notion that Anglo was a going concern.

Were these or national equivalents to be created by the national authorities of the core, we could well imagine much longer periods for extinguishing being placed in play.  If the Anglo ProNotes had been repaid over 300 years instead of 30 they would not have been an issue, except morally. While the numbers seem large, in the context of the (shrinking ) ECB balance sheet of 2.2b even the largest amount required is not unbearable. Part of the ECB objection to the notes was that the liquidity created was done so “outside its control”. A system of central banks cannot have individuals pursuing their own monetary policy in an uncoordinated and national focused way – that is what brought down the Rouble zone. But as a once off final fix for the banks? Its worth a shot.  In all probability the 750b would not be required in full. While the 40% fall over 6 months in equity values is high, this does not happen very often – but it does happen about 1 time in 25.   Doing this would ‘cure’ the banks, in so far as it would allow, in fact would have to be accompanied by,  a full write-down of impaired loans and thus position them for regrowth. It would allow a clean start to be made. Clean the mess up once and for all, and restart.

Alas, the inflation hawks and their fears  dominate the ECB, fears never more imaginary than now with deflation staring the Eurozone in the face, will not allow this. The consequence is that we flirt with a further crisis not merely knocking out the periphery but the core. As we have throughout the crisis we face a choice of unpalatable alternatives.  European banks will follow the irish lead – either via partial or full zombification with the odd twitch of life now and again while hoping that the economy does nothing remotely scary all the time barely functioning and taking a decade or more to get back to any health, or by the solution which worked, in that it allowed a bank to be cleansed and to br resolved.

How to organise an academic conference | 10 tips | Higher Education Network | Guardian Professional

How to organise an academic conference – 10 tips

Below is a link to The Guardian HE Network blogpost by my good self…

via How to organise an academic conference | 10 tips | Higher Education Network | Guardian Professional.

Parliamentary Committee on Communications member confuses browsers with websites

Sigh

What can one say…

Patrick O’Donovan is a member of the Dail Committee on Communications. The government of which he is a member is mad keen on the aul knowledge economy, cloud commuters and all that.

Today, he has called for opensource  internet browsers to be banned. Yep. Hard to see how we will access the net and email each other but hey… Its a small price to pay for safety. The leading opensource browser, with 15-20% of web traffic, is Firefox. Ban this filth now.

He seems, but a statement (which wont come of course) would be nice to clear it up. to have confused darknet sites such as Silk Road with browsers. or maybe he is thinking about Bitcoin? or TOR?

This is worrying. This man, who is also a trained industrial chemist, either doesnt know or care that sites are not browsers. Its also worrying that instead of calling for more cracking down on illegal activity he invokes censorship memes. Do FG want a Shure tis Grand Firewall ? Are we to follow Iran, Burma and China?

Mistaking browsers for sites is the equivalent of mistaking a pencil for a novel.

Cat amongst pigeons, Sunday Edition

Citibank is hardly the last bastion of radical socialism. So, when their chief economist comes out with (to many of us blithering obvious) statements such as

perverse feedback loops between fiscally weak sovereigns and (near) insolvent banks, financial repression – governments stuffing the banks in their jurisdiction with sovereign debt they have trouble selling

advanced economies have socialised financial-sector losses caused by the crisis.

Even though austerity in the periphery and in some of the highly indebted core countries (the Netherlands, Belgium) has reduced the deficits of most governments, more austerity will be required to reduce the deficits to sustainable levels in most countries, unless something is done to solve the stock overhang problem.

 

Growth will not come to the rescue. A cyclical recovery would require a much more expansionary ECB monetary policy, the use of fiscal stimuli in those countries that have excessive external surpluses (especially Germany), and market access for the sovereign on attractive terms.

 

For political/monetary ideological reasons, a monetary-fiscal stimulus in the Eurozone is highly unlikely, regardless of how desirable it may be from the perspective of economic activity. Potential output growth is now estimated by the ECB to be no more than 0.5%. Although ageing, low investment, and disappointing total factor productivity growth are undoubtedly having a negative impact on potential output growth in the Eurozone, the 0.5% estimate is unduly pessimistic.

The sovereign debt stock problem remains. Although the Eurozone political leadership has gone on record as saying that there will be no more sovereign debt restructuring involving private holders of sovereign debt after Greece (give or take Cyprus), all options to deal with the sovereign debt overhang should remain on the table.

 

Debt restructuring for highly indebted sovereigns in the Eurozone (through maturity extensions, coupon cuts, interest deferrals, debt exchanges involving present-value haircuts, or through face-value haircuts), should be on a menu that also includes partial public debt mutualisation (burden-sharing by the core). Such public debt mutualisation can be done either through the front door (through explicitly mutualised fiscal facilities such as the European Stability Mechanism) or through the back door (by the ECB purchasing the debt of excessively indebted sovereigns and accepting net-present-value losses or face-value losses on these purchases, up to complete cancellation of the debt involved). Another possible way of addressing a public debt overhang without multi-year demand-destroying fiscal austerity would be a one-off wealth levy.

 

 

via Why fiscal sustainability matters | vox.

Then we need to think hard. Watch the mainstream media ignore this, watch the bond chorus swing into action to decry it.

The cloud of delusion in the silver lining of Irish recovery

This is a version of my column in the Irish examiner 11 January 2014 . Every silver lining, they say, has a cloud.  Or is it the other way round? The new year has certainly got off to a bang in terms of the nascent Irish recovery. In the last week we have seen three developments which on the face of it seem to be proof positive that we have moved forward turned the corner to face green shoots and so forth. The NTMA succeeded in getting away a bond issue, so also did Bank of Ireland, and Michael Noonan was voted Best Finance Minister in Europe. While all three are nicer than stories about the impoverished of south Dublin resorting to hunting and eating rats with wings, none of them actually amount to much more than the return of delusion.The question is – who is deluded.

 

deal_with_it_funny_bond_trader_plate-rbd63e395d5a84dfba552f30158567451_ambb0_8byvr_324Lets take the last one . Its ego boosting to Michael Noonan, one can be sure, to be so voted. And in so far as we have a representative democracy we should bask in the wan reflection. For sure the credit goes to the Irish people who have knuckled under (or left) and sorted out the mess of the Ahearn era (for which of course they had voted in majority numbers). Its certainly less embarrassing than the 2009 and 2010 rankings when the then minister , Brian Lenihan, was ranked at or amongst the worst. However, the rankings are really nothing to do with the minister and all to do with the economy. In so far as the finance minister has an influence on the economy and its performance reflects theirs, then there is a relation. But the reality is that Noonan is lucky (as Lenihan was unlucky) in that Ireland has been determined to be the best boy in class, taking its beatings and not complaining. The whining noise from the proles is a mere irritant to the financial markets who applaud (while simultaneously laughing up their sleeves at ) us for paying all our debts and more.
11-landed_on_taxpayerIn the case of bank of Ireland we see the raising of 750m in unsecured unguaranteed bonds by the bank. This cost them approx. the same as the government ten year, and around 1.25% over the government 5 year rate. This again is hailed as being a great harbinger of recovery. It is not. We have seen unsecured unguaranteed senior bonds being repaid not by the issuer but by the taxpayer time and again. There is no doubt in my mind that this would happen again. These are as secure as government debt, in practice, when you are a too big to fail bank, as for us BoI most surely is. So again – why ask for a premium when you know you need none – its either delusion as to the real state of repayment or simple greed. In any case, we need to see banks becoming more reliant on deposit base not on bonds. Irish banks have reduced the percent of assets financed from international bonds from the low teens (at the height of the property boom) to about 3% now but domestic deposits still only account for 1/3 of all funding . This needs to be significantly increased. The paper by Thorsten Beck, the world ranking expert on banking crises and their aftermath, suggests that Irish banks remain in a parlous position. But having created the Two and Half Men of Banking (albeit not remotely as funny) the government cannot now express anything but approval and confidence in anything the banks do, including this. We have exchanged too big to fail banks for really and truly too big to fail banks, and there is no reason why they should not act in as foolish a manner as they have before. Whats the downside?

michael-noonan-fingersIn the Draghi era, where the ECB shows its muscle without having to use it, our bond yields have collapsed – that means prices have risen, gifting massive profits to the holders who calculated that no bond would burn. Combined with the exporting of much of the unemployable youth, a plethora of state activation actions to prepare people for jobs (whenever they happen) and a rise in desperate entrepreneurs we have reversed headline unemployment. To top that we have swallowed the austerity medicine to move to a near primary surplus – that is that we now more or less pay our way on a daily basis so we can slap down hard those that gibber “sure were borrowing billions to pay the <insert public sector/welfare media target de jour>” . Noonan has been lucky and has made his luck – a canny hardened politico he knows how to do that and who can begrudge him this valedictory honour. But its as ephemeral as morning mist.

LoanSharkOn the Markets we are also being lauded. The NTMA had a good week, in that there was massive demand for Irish ten year debt – it could have sold 14b worth of debt when it wanted to get 3b. Irish bonds are now seen as safe, and indeed there is a clear trend for much greater convergence of bond yields across the euro zone. This is strange, not that there is slow convergence but that there is any remaining divergence. There is no prospect, apart from perhaps Greece and Portugal, that sovereign bonds of euro zone countries will be allowed default. None. Therefore these are as risky or not as Germany. That is the logic of the Draghi Era – no sovereign bondholder will be burned. So why is the market not believing that? The premium for these bonds cant be liquidity – there is no problem in moving the majority of these bonds for cash. So why is there a remaining premium? Clearly either the markets are deluded and do not accept that despite all the evidence that European economies will go to the wall to repay debt there remains a risk, or governments are deluded that they can continue to do this into the future. Or both. Markets will continue to lend regardless of the reality of the macro economy so long as they are confident of getting their money back. Being willing to lend is one thing but we should not be willing to borrow regardless.

debtdestroyer_sinkingfundsHistorically governments set aside in the budget a sum of money into what was called a “sinking fund”. That was designed to pay off the principal of monies borrowed. Somewhere in the eighties we got out of that habit. We now are in effect borrowing on an interest only basis and need to get back to the habit of repaying debt without incurring further borrowing. the household as state as household analogy is a really bad one, but it has some power. We are (not really but its an analogy) like a household that has borrowed money; we pay the interest not from earnings (these go to running household expenses more or less in toto) but from further borrowings. When the loans come due we borrow from another source to repay them, and on it goes. We used, as noted, set aside some monies each year to repay the loans in toto, the sinking fund. Such old fashioned fiscal prudence needs to be revisited. Right now we are facing into an era of low nominal GxP growth . In that environment, we can only ensure that we do not increase our debt/ GxP ratio by actively reducing debt. This habit should become ingrained and not be simply a reaction to critically high levels.

Irish Banks : overvalued, overleveraged and underdeposited

This is a horrific snapshot. Its taken from a brand new paper by Thorsten Beck, presented to a conference on the Irish economy today. It compares the Irish banking system as of 2011 to a broad set of international benchmarks.  It suggests, in other places that Irish banks need to delever (reduce credit) by about another 20% and that mortgage lending might contract by the same.

Good job we turned that corner eh?