Monthly Archives: February 2014

What do we know about People Risk in Financial Services?






Despite the harsh realities of the 2008 financial crisis, lessons are still being learnt and fines for misbehaviour in the sector continue to abound.

As recently as February 2014 the Financial Conduct Authority issued its ‘largest ever’ fine of £30 million for product mis-selling to the insurance company HomeServe. Tracey McDermott, the FCA’s director of enforcement and financial crime stated ‘the firm’s culture, controls and remuneration structures meant that staff were focussed on quantity not quality.’ In Ireland we have seen the commencement of legal action against senior individuals of banks. In other countries such proceedings have concluded.

Following our successful inaugural seminar in December 2013, this seminar will focus upon behavioural issues and the paradox of employees being both the most important asset to a financial institution but also its major source of risk.

In co-ordination with Trinity College, Dublin the seminar brings together inspiring people from the disciplines of human resource management, law, finance and business to share their perspectives and learn from each other.

Keynote speaker

Dr Pat McConnell, Honorary Fellow at the Macquarie University Applied Finance Centre. Dr McConnell is an expert in People Risk, Systemic Operational Risk and the Strategic Risks faced by Systemically Important Financial Institutions. He will be discussing his paper: ‘Systemic People Risk – the Final Frontier?’

Dr McConnell will be joined by:

Professor Ruth Byrne, Professor of Cognitive Science at Trinity College Dublin who will discuss: ‘Framing Effects in Reasoning about the Moral Acceptability of Risky Choices

Professor Blanaid Clarke, who holds the McCann FitzGerald Chair in Corporate Law at Trinity College Dublin. Professor Clarke will present her paper: ‘Board Directors: What can we Expect of Them?

Dr Michael Dowling, Lecturer in finance in Dublin City University, Ireland will present his work on Irish banks: ‘From Hubris to Nemesis: Irish Banks, Behavioural Biases, and the Crisis

Dr Mary Keating, Associate Professor at the School of Business at Trinity College Dublin, will present her research regarding ethical leadership: ‘The Meaning of Leader Integrity

Wednesday 26 March 2014
09:30 to 16:00
Institute of Bankers in Ireland
1 North Wall Quay
Dublin 1

Attendance is FREE but the seminar is strictly limited so please book early.

We have a limited number of small travel bursaries available for attendees and a few bursaries to cover travel expenses for PhD students. Please indicate if you want to be considered for a bursary when you register by emailing Dr Cormac Bryce:

Register at

With grateful thanks from the Economic and Social Research Council


Equality is good – but it costs.

A version of my column in the Irish Examiner.

The last few weeks we have seen yet more charitable and voluntary bodies being raked over the coals of media stoked political charcoal, regarding their salaries and payments.  A new line now seems to be emerging in government; that those who are in receipt of public funds should have their salary details made public. That makes eminent sense. Of course, it would be much more credible were it to be actually done. Eamonn Gilmore is not powerless in this regard. He is the deputy prime minister and the leader of a minority party without whos support there is no government.  We have seen minister after minister come out and leap on the bandwagon of public concern around salaries. After a few trots round the track they quietly slip off and hop back into the merc for a bit to recuperate. Its also notable that while they have stood back and held the coats while the charity sector gets a licking they seem to be joyfully powerless to compel details of, say, NAMA or NTMA staff, or the staff of the state supported or bailed out banks. Its never clear if the call for transparency is around a significant sum being given from the state or if a single penny is enough to require transparency. As in so much this is reflexive gobwagoning.

Transparency is in general a good thing. If the ministers truly wished to have transparency across the salary pitch they would adopt the Nordic model and make tax returns public. Yes, yours. And mine. That would at a stroke render moot the staged faux outrage by ministers and baa baa baaackbenchers around pay.

While it would satisfy the prurient itch in all of us as to what our fellow workers and neighbors earn it would also act as a powerful signal. That signal would not however be one that any Irish government would wish to send, as it would be a signal of the true state of inequality in Ireland.  The reality is that we are seeing in the world the rise and rise of a plutotarchial class that would put Marcus Crassus to shame.  At one level this is the reward for disruptive talent. Some inequality is good as it acts as a spur. If people see that talent is rewarded that hard work pays off and that risk is rewarded than they will act accordingly. But the evidence of economics and the feeling in many peoples guts is that this is very nonlinear. At higher levels of inequality the situation flips – why work hard, why invest, when the hyperwealthy have all the power. The oldest golden rule is that he who has the gold, rules.

The wonderful book  “The Spirit Level” makes a strong case that it is income inequality within countries (as well as between them but more strongly within) that matters for social outcomes with long economic tails.  Child welfare, crime, social deprvation, social inclusion, interpersonal trust and social mobility, all these are strongly associated with inequality. More inequality is associated with poorer outcomes in these metrics.  In the domestic context an interesting recent finding suggests strongly that innovation and income inequality are related, strongly and negatively. The less unequal societies are the more innovative it seems they also are.  And innovation, we are told, is A Good Thing.  A practical and chilling example of how the rich will eventually choke on their own money was shown recently.Research indicates that 90% of the growth in consumption in the USA over recent decades came from the top 20% of income earners.  In the end, if there is no mass market for products then companies will cease innovating. We will see stagnation in product innovation and in the end in the very engines of growth that have propelled the 1% to power.

Ireland is not an especially unequal society.  Inequality in Ireland tends to be a feature of the bottom not the top – we have quite a gap between the lower earners and the median earners, but not as much between the median and the higher earners. Nonetheless, we are by no means an equal society. Greater equality can arise only by redistribution of wealth. Power and money beget power and money and thus relying blindly on economic growth will not and has not resulted in less inequality. Redistribution implies tax. Nobody likes tax increases, but a higher rate of tax on higher earners would result in at lest in principle an ability to reduce inequality.  The difficulty for politicians is that they cannot persuade people of the need for same and will not .  Leaving aside the lack of a vertebral column amongst our leaders, the issue is also rooted in behavioral economics. Those who do not have sufficient income to be liable for any increased income taxes are unlikely to vote for them in any case. People like lottery type payoffs with positive skewness – in other words, they like the chance that they may make it big. And if they were to make it big, to become the high earner, they would not wish to pay the higher tax. The difficulty is that the preconditions to achieve high payoffs may require higher taxes to engender them.

Who really knows the rate of inflation (hint – not government) ?

Much talk around Europe is on the worries of inflation or deflation. Part of the problem in assessing this is that inflation statistics are stale. They are collected on the basis of representative baskets of goods and are published with a delay. For Ireland the basket of goods was updated in 2007 and then again in 2012. Basket composition issues can lead to changes in the apparent inflation rate.

Wouldn’t it be nice if we had realtime inflation? Where we could see, on a day to day basis, inflation and deflation in key sectors? Well, we can, IF we pay. A company collects these data, for a vast number of countries and for a large amount of sectors. Ireland is included. In fact, in 2009 the originator of this gave a talk at a conference in Ireland.

But we don’t know. State Street in the IFSC know. They are partners with the company. But written responses from the government are clear : the Irish state does not collect nor does it purchase these data. Why is that?

Journal of Behavioral and Experimental Finance : First Issue

JBEF FINAL Cover Design Aug32012The first issue a new journal is always an exciting time, the more so when one is the Editor.  Today we see such, with the launch of a new journal, with my good self as the Editor.  The aim of the Journal of Behavioral and Experimental Finance  is to provide a single place for the intersection of two distinct fields; finance (in the broadest sense) and behavioral/experimental approaches. The first few papers are now online

Finance is now mature as a discipline, and behavioral / experimental economics has achieved a solid status. Yet, despite growing usage of the experimental toolkit in finance and the growth of learned associations in the area no journal existed as an outlet dedicated to this endeavor. Similarly behavioral approaches have become common as lenses through which to view financial issues, and while there do exist some journals it is clear that this is a field that is underserved. Cynics will no doubt suggest that paper never refused ink, but the reality is that as knowledge expands so too does the need to publicise and critique it. The days when a learned person could encompass the leading edge of scientific thinking by reading the Philosophical Transactions of the Royal Society are long gone.

Academic peer reviewed journals are, for all their problems and issues, at the very core of how researchers communicate in the modern academy. This is likely to remain the case for a considerable period of time.  The quality and impact of a journal depends on its authors, its readers and on its editorial processes. I believe that this journal has the potential to very rapidly become a leading outlet.  I am fortunate to be supported by an extremely talented team at Elsevier, led by the publisher Jagna Mirska-Ghent. In many respects it was her vision that led to the creation of the journal, shepherded by Marc Chahin. The editorial board contains many persons who have authored key papers in behavioral and experimental finance, as well as industry representatives. It is, I believe, vital that a discipline such as finance, which in my view must be a supportive function of business not just a mere end in itself, we in the academy keep in regular touch with industry and vice versa. The editorial board and I warmly welcome submissions from industry.

This first issue contains papers that I believe give a good indication of the breadth we wish to cover in the journal.   We welcome papers that address questions in corporate finance, asset pricing, financial econometrics, international finance, personal financial decision making, macro-finance, banking and financial intermediation, capital markets, risk management and insurance, derivatives, quantitative finance, corporate governance and compensation, investments, market mechanisms, SME, microfinance and entrepreneurial finance, where such research is carried out with a behavioral perspective and/or is carried out via experimental methods. Social and management sciences cannot be effectively investigated with one approach only, and there is no one correct model nor method. In the wake of the Global Financial Crisis modern economics, macro and finance in particular, have come under well justified criticism for too narrow a focus both in terms of approach and model. We trust that over time this journal will assist in creating a more open environment

So what is in the first issue? Over the next few days papers will start to appear on the site. With a plea towards  openness. Aggarwal and Goodell, in their paper, note that in finance and to some extent in accounting researchers need to look for inspiration beyond where we have traditionally looked. The role of national culture as a mediating factor in exchanges is well accepted in many social sciences, but is only very recently being introduced in finance. They plea for this gap to be filled showing how cultural perspectives have greatly aided international business and management scholarship.

Two papers review historical aspects of behavioral finance. Branch draws parallels with institutionalism, the failure of which to thrive despite having some decades where it was seen as the wave of the future should suggest to us that nothing is given. Although Thaler (1999) may be right that in the end there will be no behavioral finance as “economists will routinely incorporate as much behavior into their models as they observe in the real world”, the failure of institutionalism should give us pause.  Larkin delves much further back into history and philosophy, reminding us that it is in fact only relatively recently that the centrality of the human was sidelined in economics. Finance as an outgrowth of economics suffered due to it coming to growth just at the time that the human was least integrated in economics.

Seiler shows how money illusion, in a real estate setting, impacts on bubble formation. He demonstrates that with careful framing this money illusion can be mitigated.  The inflation and collapse of real estate bubbles has been a recurrent feature and one that arguably precipitated many aspects of the crisis, and any paper that sheds light on how to slow the formation of a future bubble should be warmly welcomed.

Fullbrunn and Haruvy , and also Sonsino and Shavit provide us with experimental papers. Fullbrunn and Haruvy shows how dividend signaling emerges in a market subject to takeover bids, a variant of the investment game.  Sonsino and Shavit examines the effect of the financial crisis on portfolio formation, finding that the “misperception of risk” issue raised by Shefrin dominates the thinking of investors.

Superstition should, in traditional finance, have little if any role to play in the pricing of stocks.  Despite this there have been numerous papers that have demonstrated some influence. Auer and Rottmann investigate  two such issues – the Friday the 13th effect and tetraphobia (fear of the number 4). They find mixed evidence but conclude that in their sample of Asian markets there is little strong support for superstition influencing the markets .

We conclude the first issue with two papers on sentiment. Pownall and Borgers paper is conceptually linked to Sonsino, in that both examine attitudinal impacts on investment. They find, using Dutch data, that investment in socially responsible stocks emerges less as a rational economic decision and more as a way to show an individuals solidarity with the aims of the funds. Brooks et al also examine sentiment, around disposals, finding that investors focus on the announcements rather than on the reportage of the announcements.

Thaler, Richard H. “The end of behavioral finance.” Financial Analysts Journal (1999): 12-17.

No, Eddie, we are not oppressed by the state.

Today in the Sunday Independent the occasional commentator, sometime property developer and fulltime corkman Eddie Hobbs has what my old mam used to describe as “an awful screed“. She was from Corlk…

As is often the case with Eddie there are some solid points made but its as usual hard to find these within an overblown emotive and bitter tone.
His central thesis is that the state is oppressing us. Us here seems to be SME owners. Its hard to tell with his wild uncontrolled gunfire…

Clicking on the chart will give you a page from Eurostate which is the latest cross national comparative data on tax structure in the EU. The chart is for ireland.
Its compared with GDP because guess what – thats the international benchmark. WE have decided that we want to shelter a MNC sector and so complain we want to use GDP. On that Eddie and I are at one. IT wont, shouldnt and isnt washing with our partners.
So, lets see. The rankings are 1 = highest.
We are very much towards the bottom with regard to tax paid by employers. We are very low with regard to the % of tax collected by indirect taxation (VAT). We are very low in terms of business capital taxes. Etc etc. A whole herd of sacred cows that gallop through the national debate are turned into hamburger by the facts.

Link and Me Part 2 – This time its NOT spam…

So having been banned for spamming ( see here) Boards have now decided, whoops, no it WASN’T spam. They even undeleted the not-spam posts.

No contact from them however, to explain/outline/apologise. Which is odd, as y’know, it  was clearly not only not-spam but a mistaken deletion. A moderator agrees. But perhaps any further action needs to be approved by the StoneCutters.

Not good enough lads. Not nearly. But your getting there.

Institutional affiliations of INFINITI submissions

Each year I chair the INFINITI conference on International Finance. We are now in the throes of paper selection. Below is a count of the institutional affiliations of papers sent in to date. 

Note the absence of some major Irish universities…

Adam Smith Business School, University of Glasgow


Aix-Marseille School of Economics

Aix-Marseille University

Asia University

Asian Development Bank

Asian Development Bank (ADB)

Athens University of Economics and Business

Athens University of Economics and Finance

Auburn University

Babson College

Baden-Wuerttemberg Cooperative State University

Banco Central do Brazil

Bangor Business School

Bangor University

Bank of Canada

Bank of England

Bank of Finland

Bank of Greece

Bank of Italy

Bank of Korea

Bank of Spain

Banque de France

Banque de France and Paris-Dauphine University

Bar Council of Ireland and Griffith College

BI Norwegian Business School

Bocconi University

Bocconi University, IGIER

Bogazici University

Bond University

Boston College

Boston University

Bournemouth University

Brandeis University

Brookings Institution

Brunel Univ

Brunel University

Business School, University of Swansea

Cambridge University

Cass Business School

Catholic University of Portugal


Center of Excellence SAFE

Central Bank of Chile

Central Bank of Colombia

Central Bank of Ireland

Central Bank of the Republic of Turkey

Centre d’Economie de la Sorbonne

Centre for European Policy Studies

Centre for Fiancial Econometrics, Deakin University

Centre National de la Recherche Scientifique (CNRS)

Charles University

Chinese Academy of Sciences

Chinese University of Hong Kong

Chosun university

Chung Yuan Christian University

City University of Hong Kong

Clemson University

CMBS Universitas Padjadjaran

Columbia University

Complutense University of Madrid

Connecticut College

Cornell University

Cranfield School of Management

CREATES, Aarhus University

CREI, Universitat Pompeu Fabra, and Barcelona GSE

Cyprus University of Technology

Czech National Bank

De Nederlandsche Bank

De Nederlandsche Bank (DNB)

Deakin University

Dept. of Economics

Deutsche Bank

Deutsche Bundesbank

Deutscher Bundestag


DIW Berlin

Dublin City University



Ecole Polytechnique Federale de Lausanne

Edge Hill University

Erasmus School of Economics

ESAN University


ESMT European School of Management and Technology

ESSEC Business School and THEMA-Universit de Cergy-Pontoise

Eurofidai CNRS

European Bank for Reconstruction and Development

European Central Bank

European University Institute

Ewha School of Business

Universidade do Porto

Universidade do Porto

Faculty of Business Economics in Kosice, University of Economics in Bratislava

Faculty of Economics & Business Universitas Padjadjaran

Faculty of Economics and Business, Universitas Padjajdjaran

Faculty of Economics, University of Ljubljana

Faculty of Management Sciences and Economic Of Sousse

Faculty of Management sciences and Economics of Sousse  , Tunisia

Fairfield University

Federal Reserve Bank of Cleveland

Federal Reserve Bank of Cleveland; University of Kentucky

Federal Reserve Bank of St. Louis

Finnish Competition and Consumer Authority

Fordham University

Frankfurt School of Finance

Freie Universit Berlin

GC university Faisalabad


Georgetown University

German Development Institute

German Institute for Development Evaluation

Ghent University

Goethe University Frankfurt

Graduate Institute of International and Development Studies

Griffith University


Harvard University

HEC Montreal

Helmut Schmidt University Hamburg

Heriot-Watt University

Higher School of Economics

Hosei University

Humboldt University at Berlin

IAE Aix en Provence and Greqam.

ICFAI University Tripura

IESEG School of Management – France

University of Carthage

University of Sousse

IIT Bombay

Imperial College London


Indian Institute of Technology Madras

Indian Institute of Technology, Kanpur

Indira Gandhi Institute of Development Research (IGIDR)

Indira Gandhi National Open University ,New Delhi


Insper Institute of Education and Research

Institut des Hautes Etudes Commerciales

Institute for Financial Research (SIFR) and Swedish House of Finance

Instituto UniversitÌio de Lisboa (ISCTE-IUL)

Inter-American Development Bank

International Institute for Self-governance

International Monetary Fund

Iowa State University

IPAG Business School & High Institute of Management of Tunis

Ipek University

Istanbul Technical University


Jaume I University

Joint Vienna Institute

Karlsruhe Institute of Technology

Keele University

Kiel Institute for the World Economy

King’s College London

Kingston Business School

Kookmin University

Korea University

Korea University Business School


Kuliyah of Economics and Management Sciences (KENMS), International Islamic University Malaysia


Lancaster University

Lancaster University Management School

Lancaster Universtiy

Larefi, University of Bordeaux

Lebanese American University

Leeds Metropolitan University

Lehigh University

Liverpool University

London School of Economics

Loyola University Maryland

Lucerne University of Applied Sciences

Maastricht University

Macquarie University

Miami University

Michigan State University

Middlesex University

Mohamed Seddik Benyahia University, Jijel

Monash University

Monastir University

Monterey Institute of International Studies

Moscow state University

National Dong Hwa University

National Taiwan University

Neoma Business School

New School for Social Research

New York University

New York University — Abu Dhabi

Northumbria University

NUS Business School

NUST Business School


Oesterreichische Nationalbank

Office of the Comptroller of the Currency

Ohio University

Open University of Cyprus

Osaka University

Oviedo University

Ozyegin University

Paris School of Economics and Paris 1 Pantheon-Sorbonne University

Paris-Dauphine University

Poznan University of Economics

Radford University

Renmin University of China

Rhodes College

Rutgers University and Cyprus University of Technology


RWTH Aachen University

Saint Leo University

Sapienza University of Rome

School of Management Fribourg

Seoul National University

Smurfit Business School, UCD

SOAS, University of London

Southwest University of Finance and Economics

Southwestern University of Finance and Economics


Stockholm University Business school

Suchon National University

Swiss National Bank

Swiss Re

T A Pai Management Institute

Tallinn University of Technology

Technische Universitaet Dresden

Technological Educational Institute of Crete

Terry College of Business, University of Georgia

Texas Tech University

Thammasat University

The Federal Reserve Bank of St. Louis

The University of Oklahoma

The University of Queensland

The University of Sydney Business School

The University of York

The World Bank

THEMA- Cergy-Pontoise

Tilburg University

Tor Vergata University

Trinity College Dublin

Trinity University

Tunisian Institute of Competitiveness and Quantitative Studies (ITCEQ)

UC Berkeley


UHA & EM Strasbourg (LaRGE)



UniStra, EM Strasbourg (LaRGE)

Univeristy of Indiana

Univerity of Tasmania

Universidad Adolfo Iba̱ez

Universidad Carlos III de Madrid

Universidad Complutense de Madrid

Universidad de las Americas Puebla

Universidad de Santiago de Compostela, Spain

Universidad del Rosario

Universidad Politcnica de Cartagena

Universidade do Porto

Universidade Portucalense – Infante D. Henrique

Universita Politecnica delle Marche

Universitas Padjadjaran

Universitas Siswa Bangsa Internasional

Universitat Automa de Barcelona

Universitat Rovira i Virgili

Universite de Paris I – Panthon Sorbonne

Universite Lyon 2

Universite Paris Dauphine

Universite Rennes 1

Universite Bocconi

Universite Ca’ Foscari, Venezia

Universite Cattolica

Universite degli Studi di Milano/Bicocca

University Aboubekr BELAKAID of Tlemcen

University Center for Economic and Managerial Sciences, University of Guadalajara

University College Dublin

University College London

University of Essex

University Luigi Bocconi

University of Aberystwyth

University of Akron

University of Angers

University of Barcelona

University of Bath

University of Bayreuth

University of Beira Interior

University of Bern

University of Birmingham

University of Bremen

University of Bristol

University of Cagliari

University of California at Berkeley

University of California, Berkley

University of Cambridge

University of Canberra

University of Central Florida

University of Cologne

University of Colorado, Boulder

University of Cyprus

University of Delhi, South Campus

University of Duisburg

University of Duisburg-Essen

University of Duisburg-Essen/Kiel Institute for the World Economy

University of Economics and Law

University of Economics Ho Chi Minh City

University of Edinburgh

University of Essex

University of Evry Val d’Essonne

University of Florida

University of Geneva

University of Geneva and Swiss Finance Institute

University of Georgia

University of Giessen

University of Glasgow

University of Goettingen

University of Groningen

University of Guanajuato

University of Guelph

University of Hertforshire

University of Innsbruck

University of Kent

University of Las Palmas of Gran Canaria

University of Lille North of France

University of Lincoln

University of Linz

University of Liverpool

University of Luxembourg

University of Lyon GATE-LSE

University of Macau

University of Macedonia

University of Magdeburg, Halle Institute for Economic Research

University of Malays

University of Manchester

University of Maria Curie-Sklodowska University in Lublin

University of Massachusetts Dartmouth

University of Melbourne

University of Mississippi

University of Namur

University of Nottingham

University of Oklahoma

University of Oldenburg

University of Osnabruck

University of Oxford

University of Padua

University of Palermo

University of Patras

University of Pecs

University of Perugia

University of Porto

University of Portsmouth

University of Portsmouth, Portsmouth Business School

University of Queensland Business School

University of Regensburg

University of Rennes

University of Salamanca

University of Science and Technology Beijing

University of Seoul

University of South Australia

University of Southampton

University of St Andrews

University of Stirling

University of Strasbourg

University of Surrey

University of Sussex

University of Szeged

University of Tasmania

University of Technology, Sydney

University of Tunis

University of Virginia

University of Viterbo “La Tuscia”

University of Warsaw

University of Washington

University of Wellington

University of Western Sydney

University of Wisconsin-La Crosse

University Politehnica of Bucharest

University Rey Juan Carlos


Vrije Universiteit Brussel

VU University Amsterdam

Warsaw School of Economics

Waseda University

Waterford Institute of Technology

Westphalian Wilhelminian University of Munster

WHU – Otto Beisheim School of Management

Wichita State University

World Bank

Xiamen University


ZEW Mannheim


The Irish Economy – Out of one wood, into another?

This is a version of my column published in the Irish Examiner 8 Feb 2014. It takes a long time to recover from a banking crisis. If we were unsure of that we need but look around and notice that we still are talking and fretting about ours.

Seven years ago Irish bank shares share prices were at or near all time highs. Lending for house purchases and deposits inflows to Irish banks were also at all time highs. So also were house prices. And then it all began to unravel.  The children born at the bursting of the bubble, who will carry the cost most of their working life, are now in senior infants or first class in school. And still it isn’t fixed. Only this week do we see the first criminal trial arising from the banking shenanigans. This week also we saw a report by the EU which sharply criticized our lethargy in dealing with bringing criminal, especially white collar, trials to justice.  The Cowen government moved neither swiftly nor decisively when the storm hit.

But things may be changing.  At the annual meeting of the Allied Social Sciences, a sort of Woodstock for economists and likeminded folks, a paper was presented on banking crises. The link above is to the paper – there is a longer version but it is firewalled. Reinhart and Rogoff have previously come in for some (more or less justified) stick on account of a missed spreadsheet error in one of their papers. The paper in question was at the heart of the meme propagated that after 90% debt/GDP countries enter a death zone. However, to my mind their more important work by far is in economic history, where in a series of books and papers they have provided comparative data on banking crises and bubbles. Much of the problem with modern macroeconomics is a twin crisis of insufficient data and a lack of a historical perspective. There is no excuse for this in the area of banking crises as we have not only the work of RR but also a comprehensive database from the World Bank.

The RR work provides details of 100 banking crises. Its well worth reading. The main finding is that the effects of the crisis take a long time to peter out. In 50% of the cases real GDP per capita has not recovered to pre crisis levels even after 6 ½ years. On average it takes 7 years.  Ireland has had a really severe banking crisis. RR create a measure of the crisis severity – the data are shown below. In terms of the post WW2 period it ranks in the top ten most severe crises as measured by declines in per capital GDP.  What is however apparent is that we may, based on the real GDP per capita data available, be right on target to be an average recovery. Our GDP figures of course are somewhat distant from the reality of people on the ground, but the fact remains that GDP is what the rest of the world measures as being available for the state to distribute. That we have chosen to in effect shelter a large chunk (the fdi sector) is our own decision. Mind you, with the international moves to make tax arbitrage by MNCs less attractive, how long the GNP/GDP wedge will persist is debatable.

This does not mean we are out of the woods by any means. Entering the crisis with a healthy debt to GDP ratio of 25% in 2007 we are exiting it with one closer to 125%.  Whether high debt causes slow growth, slow growth high debt or more likely both working together, this ratio needs to come down. And herein lies a problem. Europe, and Ireland, are teetering on the brink of deflation. We are used to inflation – rising prices. Deflation however is where prices fall. And while inflation can be bad at high levels deflation at even moderate levels is disastrous. With deflation there is little incentive to spend – prices will fall so why spend now. There is little incentive for firms to invest in new products –demand will be depressed until people consider that prices are likely to stabilize or rise. And for those with debts, that including states with high debt/gdp ratios and households with mortgages and personal debt, it is ruinous as the real level of debt increases over time.

At a wholesale level, the price that companies get, deflation is already a reality. Across a wide swathe of the Irish economy prices have been falling for 6 months or more. This is particularly evident in manufacturing and related areas. Indeed, surprising as it may seem to the consumer, it is also the case in most food areas, save dairy. At the consumer price level of the 12 main categories of goods and services 6 have shown deflation in the last two months. Indeed since 2010 deflation has been the norm in clothing, furniture, communication and recreation.  At a European level overall inflation is now close to zero. What is needed is moderate, 3-6% inflation.

The ECB, again, is in the firing line, as it controls the money supply. However facing  broken banks and close to the zero interest rate bound there is a limit to what monetary policy can do. Eurozone governments cannot pump inflation by fiscal means as they are constrained by the various macroeconomic treaties. We are heading for a decade or more of stagnation unless the ECB can both clean the banks and prime the pumps. What chance that ? Draghi has dismissed deflation as a risk – in his press conference he noted that while there was some deflation (but he didn’t call it that) in the program countries (Ireland, Greece, Spain and Portugal) this simply didn’t matter for the core. We have left the woods of austerity for the darker woods of deflation. And nobody who matters cares.

deflation ireland

Year Country Severity
1857 France 10.9
1857 Germany 4.8
1864 Germany 13.8
1866 Italy 22.8
1866 UK 3.8
1873 Canada 18.7
1873 Germany 15.2
1873 US 7.4
1873 Austria 6.3
1890 Brazil 42.7
1890 Uruguay 40
1890 Argentina 23.3
1890 USA 20.2
1890 Portugal 11.3
1890 UK 10.3
1891 ITALY 15.4
1893 Australia 48
1894 NewZealand 9.8
1907 US 21.5
1907 Italy 6.6
1907 Japan 5.9
1907 Sweden 5.7
1907 France 2.8
1908 India 13
1908 Canada 10.8
1908 Mexico 3.2
1920 UK 29.7
1920 US 10.3
1921 Italy 46.5
1921 Norway 15.8
1921 Denmark 6.2
1922 Sweden 12.4
1923 Canada 40.1
1923 Portugal 8.9
1923 Brazil 7.7
1923 Japan 6.7
1926 Chile 62.6
1927 Japan 13.3
1929 Mexico 47.1
1929 India 39.2
1929 USA 38.6
1929 Austria 33.4
1929 Brazil 21.3
1930 France 25.9
1930 Italy 13
1930 Norway 12.4
1931 Spain 60.6
1931 Uruguay 53.1
1931 Argentina 34.4
1931 Poland 33.9
1931 Germany 24.8
1931 Romania 22.1
1931 Belgium 21.4
1931 Switzerland 18.8
1931 Hungary 18.4
1931 China 13.9
1931 Greece 12.9
1931 UK 11.6
1931 Finland 11.1
1931 Sweden 8.8
1931 Denmark 6.5
1939 Netherlands 37
1980 Argentina 39.8
1980 Chile 26.9
1981 Philippines 39.8
1981 Mexico 31.1
1982 Turkey 0
1983 Peru 57
1983 Thailand 0
1985 Malaysia 8.7
1987 Norway 3.6
1990 Brazil 17.2
1991 Finland 19.8
1991 Sweden 11.2
1992 Japan 8.7
1992 Japan 2.1
1994 Venezuela 38.2
1994 Mexico 10.7
1996 Thailand 19.6
1997 Indonesia 23.1
1997 Malaysia 15.8
1997 Korea 8.4
1997 Philippines 5.7
1998 Colombia 12
1998 Russia 7.2
2001 Argentina 28.9
2001 Turkey 12.3
2002 Uruguay 26.9
2007 Ireland 24.9
2007 Iceland 23.2
2007 UK 18.1
2007 USA 10.8
2008 Greece 36
2008 Italy 23.3
2008 Ukraine 22.4
2008 Spain 20.4
2008 Portugal 19.2
2008 Netherlands 15.8
2008 France 9
2008 Germany 3