Tag Archives: financial economists

None so deaf as those that will not hear….(AKA Irish Elites)

There was an interesting book launch last night at the Long Room in TCD. Phillipe Legrain is on a tour of various places, doing local and localized launches of his new book.

He, and Senator Sean Barrett who gave the launch, delivered very strong, impassioned speeches. In his book Legrain lays a large quantum of the blame for the mess on the failure of interlocking European institutions. He backs squarely the Irish need for sovereign debt relief ; he calls for debt-equity swaps for distressed homeowners and SMEs; he castigates the failure of the economics elite to see the crisis, and challenges the policy making apparatus of both local and European governance. He calls for hardball negotiations, and lays out a path for same.

Legrain is no fire breathing radical. He is however from personal and professional background and inclination deeply European. His book has been lauded with positive reviews.  He challenges us.

Given this, and given the importance of the topic on which he speaks, it was frankly astounding to see how widely the launch was ignored. With the exception of Sean Barrett, there was (as far as I could see) not a single faculty member from a single economics department; with three exceptions the same for business school faculties. The Central Bank? The Department of Finance? Taoiseach? Foreign Affairs? Most of the media? Any elected official of state? Nobody that I could see. We could create a list as long as the page of elite institutions (IBEC? IIEA?, ACCI? …..) who were NOT represented at this talk, or if so were very well disguised.  It was to my mind a clear example of how we have  a collective elite who have firmly pulled on the green jersey and decided to press on regardless. Maybe they are right, maybe wrong, but one thing we have learned is that groupthink is bad. We need outsiders to challenge, but we need also to be prepared to be challenged. Seems we aren’t.

 

What gets measured gets managed – so how can we manage research without measuring it?

measurementThis is an expanded version of the “Left Field” column published in the Irish Times.Over the last couple of years there has been a growing feeling amongst all stakeholders – government (supposedly representing the people), the administration (Department of Education and HEA), and the higher education sector that there is an increased scrutiny on what exactly academics do. Nobody is quite clear where the impetus comes from, just as nobody is quite clear what it is that the answer might be.Much of the heat has come on the issues of contact hours and how much research (and of what kind) is of any “use”. Some consider that universities and indeed all third level is merely secondary shcool for adults, and that time spent in the classroom, sorry, lecture theatre, is the only thing that is worth rewarding. These usually also show breathtaking ignorance about the process of scientific investigation, with the extreme suggesting that we should only fund reserach whose results we know in advance…..Yes, that SFI grant into Academic Clairvoyance was a good idea. But, in essence its a debate about value for money. Leaving aside the fact that not every thing that has a price has value and not everything that can be valued has a price, we can and should accept that it is simply good management practice to attempt to find out how efficient and effective our work processes are and how they might be improved. Its even more useful when the inputs, money and academic resources (although seemingly not administrative) are in scarce supply.

serendipEfficiency is a technical concept – its about the transformation of inputs into outputs. For a given level of inputs (academics) can we get more outputs (graduates, googles, whatever). Effectiveness is a little more fuzzy, about how well we achieve our goals. In the former case we have cost and technical issues which can and should be investigated. In the latter we need to have clarity and stability about these goals in order for them to be assessed. And, in most cases we cannot even begin to measure effectiveness for years, if not decades. Plus, directed research, chasing imposed metrics, simply is not the only way to do business. There is a very long tail and a very long halflife to both “good” teaching and research. James Clerk Maxwell published in 1873 some equations he had worked on in 1865 which were abstruse and remote. That they later formed the theoretical basis of the Wireless in the early 1900s was not a directed outcome. Boole’s pamphlet on mathematical logic in 1847 had to wait for the best part of a century until the information revolution to be seen as the transcendental work that it is now seen to be. Wohler synthesised urea, closing the gap between organic and inorganic chemistry, in an accidental discovery Perkins work on dyes and the subsequent growth of synthetic organic chemistry came from a nearly discarded experiment in the synthesis of quinine. Atomic clocks were designed to test relativity and now form the basis of GPS satellites There are hundreds of examples of transformative products that emerged as byblows, serdips or sheer accidents, from basic research. In a wonderfully lucid essay in 1939 Flexner noted the importance of curiosity, serendipity and generally pootling about.

euknowHow we are moving in Ireland is towards the introduction of workload models and key performance indicators. Key performance indicators however are inherently political. The EU “knowledge triangle” suggests that higher education trades off between supporting business, education and research. Like all policy triangles it is in fact a trilemma- it is difficult if not impossible to excel in all three domains. Note that this is not to say that it is impossible to be active in all three- just that. And In Ireland we have tried for that. We have two sectors which, if they were to be closely examined have historical and natural affinities with two legs- the IoT sector has historically been orientated at teaching and business support, the University sector at teaching and research. If we require an increased emphasis on research from the IoT without additional resources, or on business support from the universities without additional resources we will degrade one or other of the existing strengths. And anyhow, how would we know what was being done was good?

manyhatsPart of the problem in the assessment of what we academics to do is that they seem to do lots of things. We teach we supervise we design courses we examine we sit on committees we hunt grant money we reach out to the community…. Most workload models try to fine-tune these to a faretheewell allocating points for this and that. But in reality we do one thing – communicate knowledge, be it to the academy (research), students (teaching) or to business and society. And here is where the problem is. How can we measure these activities so as to allow managers to allocate resources and to reward those who outperform norms and expectations?

pacioliWe can measure business impact in a crude fashion by patents gained and monies raised and spinoffs that rival google created. This is the dominant metric now obsessing the government, seeming to treat the universities as machines for the creation of the next FaceGoogle and wondering why there hasnt been a patent that morning. J C Maxwell or Faraday or Antonie van Leeuwenhoek would probably not have been funded by SFI. We can measure teaching eficiency in a crude fashion by how many hours an academic is in class. In the Institutes of technology there is a class contact norm of typically 16h per week. That is not the case in universities, leading to the assumption that as university academics teach less they do less. Nothing alas could be further from the truth. The key difference between the modal IoT lecturer and the modal university lecturer is the expectation and requirement of research activity. And that takes time.

passageoftimeIt is a reasonable question to ask about the impact or import of the research even if we cant realistically answer– what is not reasonable is to assert that research is in some way less difficult or less timeconsuming than teaching. Research is akin to venture capital. We need to do a lot to get a little output. Success is rare and failure the norm. Publication in toptier journals is exceedingly rare and more than one as fleeting as a shy higgs boson in a ghillie suit on a heather covered hillside. Acceptance rates (success) in decent journals or in gaining leading research grants is often less than 10%. Research grants can take literally months to complete with no guarantee of success. And doing a paper takes time. It takes typically in excess of 100 hours of work to get a finance paper to a stage where one is happy to put it out for even working paper review. And then it takes a long time to get it published. It can take between 6 months and 6 years to get a paper from initial submission to final acceptance in finance and economics and other social sciences. In fact, in finance, economics and political sciences where the papers are usually data driven this time requirement is perhaps on the low side for social science generally. In the arts and humanities there can be literal years with “no output” as monographs and books are chronovores of enormous appetite. During that time the paper is usually under review at symposia, conferences etc and further hundreds of hours are input in refining and tweaking. The total time requirements for publication of a single article in a set of leading journals in finance were estimated to average over 1600h in a 1998 study. Meanwhile for younger academics, those seeking promotion or permanency, or seeking to move to sunnier climes they require publications so this process starts in PhD times and continues with up to a dozen projects in various stages of the pipeline. None of these times are captured in crude workload measurement approaches. to somehow assume that academics in universities engaging in research are idle is to display a gross ignorance of the scientific process – eureka moments are few and far between. If genius is 99% perspiration and 1% inspiration adequacy is 99.9% perspiration and .1% inspiration. A further aspect of research for those who are research active is peer review and editing . Typically a paper gets published after a couple of anonymous referees have commented on it. Doing this referee job is time consuming – typically 4-5h reading and writing per paper. If one does 12 reviews per annum that’s 60 hours, or the best part of two working weeks. Imagine the editor of a journal receiving 300+ papers per annum, each of which has to be read through prior to sending for review and we see another hidden time cost of research. Teaching also takes time beyond the classroom. For every hour spent in the class you take 3 to prepare, review, reflect and redo the work. Even if one has a stack of slides and a good strategy its imperative to do a mock runthrough (that takes about the same time as teaching) noting as one does what is outdated, what is wrong, what doesn’t flow etc. And then one redoes the slides and delivers, finding that in the class there are new issues to be incorporated, new questions raised, issues that seemed pellucid actually as muddled as a government jobs initiative…. So a 16h class contact in the IoT doesn’t leve a lot of time in teaching term to do any research even if one were so interested. Of course, there’s always the evening and weekends but the many IoT staff who wish to be research active typically use the summer breaks to do it –Christmas and easter are usually taken up with marking essays and so forth.

phrenolBy all means therefore lets look at metrics of activity. But lets recall that these metrics typically measure output, not input and therefore cant be used as such for the measurement of efficiency or still less effectiveness. That’s not to say we should not measure research output. We should. Perhaps the issue is that we are scared of what we will find. Academics are terribly resistant to being managed and by extension to being measured. But we need to accept that without open transparent measures of research we will not allow the universities to show the extent to which they are engaged with the second leg of their historic mission. Measurement of research output is a crude proxy for research activity and even more so for research excellence. But like patents and so forth it is measureable. We don’t do this in Ireland. We have experience in the UK of several generations of research measurement. Many of us have been involved in these as assessors or as units of measurement. We can and should design a model builds on these and improves upon them, that measures research output, across units and the sector. This will show that there are many who simply do not engage in research (as measured). Every academic knows of people who simply turn up, teach and disappear. This puts an unfair burden on those who do research, and it is they who should be shouting loudest for such a metric. We have some example beyond the UK. Ontario has just done a similar exercise, and there are many measures of research activity for individual disciplines in Ireland, notably business and economics. What these all show is that there are many many academics that do not come onto the research activity radar. One can only wonder what it is that they do all day. Conceivably they are engaging with business and society but most who work in the sector would smile ruefully at that idea.

Until universities and the system managers (HEA and DES) determine what the role is of universities in relation to the trilemma we cannot however begin to reward or discipline academics or the sector for resource misallocation. What gets measured gets managed. By definition a poor measurement system will deliver poor management. But we are not measuring research in any manner in Ireland. Perhaps we should start.

Green Jerseys, False Colours and the Irish Bond Market

There is a most interesting letter (of the Green jersey type) in the Irish Times this morning. It is from a Donal O’Mahony of Shankill and is on the wonderful performance of Irish government bonds. Ireland is truly lucky to have this sage, and also to have his namesake Donal O’Mahony the head of debt research at Davy stockbrokers (prime dealers in Irish debt). After all, they couldn’t be the same person, as who fly under false colours and not declare in a letter their interest and affiliation…. Anyhow, Shankill Donal states that we are addicted to “failure porn”,  in looking backwards, which tells me that the mindset that in the 1970s cut out of the biology syllabi the parts on the human reproductive system (durty filthy durty shameful durty stuff) still lives. Dont look back as then you might see stuff you dont like…

Anyhow Shankill Donal (not I guess to be confused with Davy Donal) says

” a stunning 88 per cent return in Irish government bonds since July, 2011 has gone largely unheeded by the Irish media, politicians and, most disturbingly, an insolvent Irish pensions fund industry . . . unheeded by all, perhaps, except those clear-headed international investors who see the improving creditworthiness that we ourselves discredit. “

okkkaay. Lets look at that.

First, and presumably because Shankill Donal is not Dawson Street Donal, he might not be aware of the (from my ivory tower view anyhow) significant debate on the bond performance. Shankill Donal must be a bond trader somewhere though as he focuses on the price of bonds, when most people focus on the interest rate on bonds. Shankill Donal and Davy Donal should get together and talk….Even a casual perusal of the interwebs will throw up dozens and dozens of articles on the irish bond market. But maybe Times Letters Page Donal doesnt use the intergoogler. anyhow, here is the most recent article I could find, to assuage him that yes, this ignorance is all in his mind.

Second, the underlying assumption is that the fall in yields is down to improved creditworthiness. Hmm.. Maybe he is a trader but he is no economist.  Bond investors care about creditworthiness only over the holding period. As nobody serious ever has to my knowledge suggested default on the actual NTMA issued government debt, as they were backed by the IMF and ECB for a period of years, as the strong likelihood is that some sort of (dont call it a bailout) deal will be in place from 2014 onwards, the strange thing is that irish bonds were ever so low (interest rates so high). Proof that he isnt really Dawson Street Donal is that he seems to think the fall in interest rates  / rally in bond prices is down to ourselves alone. Maybe hes a member of Sinn Fein? The fall in interest rates is of course down to a mild increase in risk appetite  a change in government from bumbling to fumbling, a realisation that the Euro is here to stay and the euro members seem willing to inflict and bear any pain to make that so, the continued efforts to stabilise the irish budget deficit, the apparent end (apart from clouds on mortgage debt and court cases on subbie toasting  to bank bailouts and a carry trade. The carry trade is of course the irish banks taking cheap ECB money and buying higher yielding irish debt. This has boosted the irish banks holdings of Govt debt to 10% or more, from 5% of a much smaller number in 2011. Victor Duggans blog on this is a must read. In essence, as Business Insider says s

“Simply put, Irish banks have dramatically increased their holdings of Irish government bonds, from a very low base.  This reflects the recapitalization efforts and tightens rather than loosens the linkages between the sovereign and domestic banks. The largely nationalized banks are funding a large share of the government’s deficit”

And those steely eyed wonderful international bond buyers that Shankill Donal loves? Well, theres one of em anyhow, Franklin Templeton, but that seems to be it. In fact, the NTMA said, and who can object

He welcomed the attention of US investor Michael Hasenstab’s Franklin Templeton Investments, which has become Ireland’s biggest private sector creditor over the past year-and-a-half by investing in bonds.Mr Corrigan said: “As an investor, Franklin Templeton are clearly very welcome in the positive view they have taken on the Irish market.”We would prefer if we had 10 Franklin Templetons, rather than one.”

In fact it seems that things might be the opposite of what Shankill Donal thinks. The NTMA very kindly publish a summary geographical holdings of Irish Bonds : the holdings of irish government bonds by non residents have FALLEN over teh last year, from 66b to 60b, from 78% to 74% of total. And this is with Franklin Templeton ploughing in. Dawson Davy Donal knows this of course, which is why he would never laud “clear-headed international investors” without caveat.

Finally of course there is the utter ignorance by Shankill Donal of diversification. No reputable or serious economist, such as Dawson Street Donal,  would urge increased home bias, or the use of domestic pension funds to purchase and buoy up government bonds (a form of financial repression). Irish pension funds should of course have some assets in all forms . And they havent done badly over the 2001-11 period – a survey showed a return per annum of 8.5%, well over the 6% global average. So whatever they are doing its not too bad.  Irish investors, including pension funds, need to be more, not less, diversified globally.

So, while its great that Shankill Donal is taking an interest and holding up a mirror to the facts, he should look up his namesake Dawson Street Dave and have a chat about whats really going on. Its not all bad news, but its not all good news, not by a long chalk….

What have the Romans, sorry Researchers, ever done for us?

Another day another paean to applied science… well, a thinly disguised call for more money to go to engineering. Coz, they make stuff y’know, not like basic researchers or heaven help us AHSS (arts, humanities and social sciences) dabblers. After all, what have the romans, sorry, researchers ever given society…This applied-basic dichotomy (and shouldn’t it be a tricothomy, as whatever happened to translation research?) is not just false its ignorant. And people who peddle it, whether they be retired deans of engineering schools, science funders or politicians who wouldn’t know a quern from a quark are ignorant of their ignorance. It’s a rumsfeldian ignorance in not knowing that they don’t know.

One cannot apply scientific concepts blindly. Well, one can but don’t expect anything much more than a blowup. Take finance (not even a science but hey…) for an example. One could argue that two equations helped blow up the financial system (aided and abetted by a range of human behavior stretching from outright criminality to buck ignorance via political sleevenism). See for discussions on copulas Zimmer, Lee, jones, and for the BS model Hartford, Pollack and Lo (the latter emphasizing the human-ware element)

The two are the BlackScholes (which can be abbreviated correctly to BS) equation for the valuation of options and its lesser-known cousin the Gaussian Copula. Most people have heard of the first and fewer of the latter. The GC describes how series move together, a multivariate version of a correlation function.

BS models and their derivatives underlay many derivative models while the GC model was commonly used to model the likely behavior of the elements of risk in collateralized debt and mortgage obligations.  And we know how well that worked.

Here is the thing: these basic science models are old. And flawed. They are theoretical constructs, incredibly useful as theories, easy to teach to undergraduates, but ones whose n-th grandchildren are being worked on to slowly, gradually, painstakingly improve the fit of the theoretical model to the real world. The application of these towards products was I contend fatally flawed by a lack of understanding by regulators and some practitioners of how the basic science was moving.

Funding into basic science improves how we apply these. Funding into translational science (which steps between applied and basic) helps improve the feedback. Funding into applied science gives the raw material for the feedback. None is more important than the other. And for a country such as Ireland where it is both impossible to outcompete in basic science with the military-industrial complexes of the world and where there is a need for high value added jobs, this gives an unpalatable policy prescription. We need to keep funding basic research to ensure that those teaching applied and translational science are at the forefront (or at least aware of where it is). If we don’t, we end up with the production of tinkerers capable of making minor adjustments to a preset form but with little understanding of the fundamentals. Worse, we end up with state funding displacing commercial R&D via that being outsourced to the third and fourth level.  R&D is high risk and so it makes perfect sense for companies to get it done outside, especially when they can then also complain that the R&D isn’t producing marketable products fast enough.

This policy isn’t sexy – it doesn’t generate lots of quick jobs and doesn’t allow politicians to open factories and ct ribbons at call centers. But then neither did the decision by Donagh O’Malley (made against the advice of the bureaucrats) to open up second level education to all. Slow burns last longer. SFI and the government science apparatchiks need to step back, take a long view and put in place structures that support a decent basic science budget, that encourages

Tumbleweed time in the Irish Stock Exchange

So the Irish Stock Exchange held  a conference  with EI on why companies should consider floating . As Simon Carswell says, its now time for the ISE to think long and hard about what it is it wants to be. One of the problems that bedevils the exchange is that it is no longer fulfilling one of its main roles, that of primary lister. The flow of IPO’s onto the Irish exchange is very poor: In Q2 2012 one exploration companies –Fastnet-  listed.  No companies listed in Q1 2012

A second major function of stock exchanges is to act as a price discovery mechanism. In this too the ISE is not exactly winning. I downloaded from Datastream the list of constituents of the ISEQ, and show below the number of days on which there were recorded zero volume, and the average daily turnover as a % of market capitalization. All data are for the last two years. In reading this bear in mind that the ISE trading mechanism is the Deutsche Bourse Xetra system therefore there are days when that system is open for trade but are holidays in Ireland. Leaving aside then the number of companies that show zero vol on a dozen or so days we see that for a not inconsiderable number of companies there are many many days when nothing happens…. This is hardly an effective way to discover prices for these companies and one wonders what they are doing on a listed exchange. Sure, the IPO proceeds can be put to good use but as an ongoing price discovery mechanism this isn’t working..

Name Zero Vol Percent Av daily To %
AER LINGUS GROUP 14 2.68% 0.10%
ARYZTA (DUB) 14 2.68% 0.04%
C&C GROUP 14 2.68% 0.25%
CRH (DUB) 14 2.68% 0.19%
DCC 14 2.68% 0.19%
DRAGON OIL 14 2.68% 0.02%
ELAN 14 2.68% 0.06%
GRAFTON GROUP 14 2.68% 0.15%
KERRY GROUP ‘A’ 14 2.68% 0.16%
KINGSPAN GROUP 14 2.68% 0.13%
PADDY POWER 14 2.68% 0.25%
RYANAIR HOLDINGS 14 2.68% 0.16%
SMURFIT KAPPA GROUP 14 2.68% 0.29%
UNITED DRUG 14 2.68% 0.16%
ALLIED IRISH BANKS 15 2.87% 0.05%
BANK OF IRELAND 15 2.87% 0.18%
FBD HOLDINGS 15 2.87% 0.18%
GLANBIA 15 2.87% 0.08%
INDEPENDENT NEWS & MEDIA 15 2.87% 0.13%
PERMANENT TSB GHG. 17 3.25% 0.22%
IRISH CONT.GP.UNT. 19 3.63% 0.21%
KENMARE RESOURCES 20 3.82% 0.02%
TOTAL PRODUCE (ESM) 20 3.82% 0.12%
FYFFES (ESM) 24 4.59% 0.15%
PROVIDENCE RES. (ESM) 39 7.46% 0.02%
IFG GROUP 50 9.56% 0.13%
ORIGIN ENTERPRISES (ESM) 69 13.19% 0.05%
PETRONEFT RESOURCES(ESM) 79 15.11% 0.03%
TVC HOLDINGS (ESM) 118 22.56% 0.12%
DATALEX 137 26.20% 0.16%
PETROCELTIC INTL. (ESM) 154 29.45% 0.00%
CPL RESOURCES (ESM) 158 30.21% 0.13%
ORMONDE MINING (ESM) 163 31.17% 0.03%
DONEGAL CREAMERIES (ESM) 183 34.99% 0.06%
ABBEY (ESM) 193 36.90% 0.08%
AMINEX 245 46.85% 0.01%
ICON 245 46.85% 0.01%
MERRION PHARMS. (ESM) 313 59.85% 0.04%
OVOCA GOLD (ESM) 331 63.29% 0.01%
PRIME ACTIVE CAP. (ESM) 382 73.04% 0.04%
ZAMANO (ESM) 406 77.63% 0.05%
UTV MEDIA (DUB) 450 86.04% 0.00%
CONROY GD.& 0TRES.(ESM) 490 93.69% 0.00%
FIRST DERIVATIVES (ESM) 492 94.07% 0.00%
KARELIAN DIA.RES. (ESM) 506 96.75% 0.00%

A journal editor seeks your views…

So, I today signed off on the agreement to be the new editor of another Elsevier journal, International Review. Of Financial Analysis (IRFA). It's a pretty decent journal, ranked in the top 40 by a recent study; it was ranked as “internationally excellent” in the 2008 Aston rankings; as “highly regarded” in the 2010 Association of Business Schools journal ranking ; as “top international” in thr 2010 Cranfield School of Management list; for mere details see http://www.harzing.org with the usual caveat that rankings are not the only or even the most desirable indicator of the quality and impact of a journal.

Now, I am aware that elsevier raises the hackles of many with regard to the debate on open access versus pay walls, but that's a debate that I'd like to avoid at the present. What I am interested in is the views of people on how we might make the articles forthcoming in IRFA more accessible and interesting. elsevier have their views on the article of the future- which of these would you be interested in seeing rolled out? For example, should video abstracts be available freely viewable? Would people be interested in a twitter feed of articles? Whst about an editorial,video, of each issue? Your ideas are sought!

 

Asset allocation in Defined Benefit Pension Plans in Europe

Mercers each year publish a DB survey, which I get a copy of.

The 2012 results are quite interesting, not least from an Irish perspective. They survey over 1300 plans, covering 600b plus assets in europe as a whole.

First, Irish plans show the highest bias towards equities of all countries. However, this equity heavy position (which we share with the UK , not surprising given our similar national cultures : see here for some research on culture and pensions) is declining over time.

Second, breaking this down in more detail, we still display a very high degree of home bias in equities, with 15% of total assets in domestic equities.  Also, reflecting the financing structure of Irish corporations, the striking lack of investment in domestic corporate bonds is also very evident. Given that across Europe as a whole 7-10% of asset allocation to these instruments is not uncommon this seems to be a potentially untapped resource for irish corporate and a useful diversifier for irish pension funds

Third, its not all gloom (well, mostly) as there are some hardy souls who plan to INCREASE exposure to euroarea perioheries.

fourth, we are not badly off when we compare Irish pension fund assets per capita to other european countries. Bear in mind however that these assets need to yield a return for possibly 25  years on retirement and you see that this is relative. Without exception europe is grossly under pension provided.

Finally, despite the bull market, despite reams of research (here, here, here ), and despite there being an increase in asset allocation towards alternative investments, pension funds are leaving diversification opportunities on teh table in the form of not going into precious metal. While this may be included in the commodities section, the likelihood is that were it a significant amount then it would be broken out. Pension fund trustees might consider if it is truly safer to invest in forestry or global macro hedge funds than gold?

Value at Risk – the construct

a nice blog on the historical evolution of value at risk

reszatonline

International and European banking supervisors are allowing banks to rely on their own internal Value-at-Risk (VaR) models to calculate their capital requirements. However, many observers who do not belong to the inner circle of financial analysts and commentators are puzzled by the concept. On the one hand, in exactly quantifying a potential loss the methodology seems to offer a sound basis for risk management and financial decisions. On the other hand, critics are numerous and events such as the recent loss of JP Morgan’s “London Whale” raise questions and reinforce distrust.

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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 17th 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 statedWithout 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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