This is no time to go wobbly, EEA edition

There is a depressing amount of wishful thinking going on in the UK right now: for a recent example see here. When Iceland’s banking system collapsed, that was a real emergency requiring capital controls: the sort of eventuality envisaged by the now-famous Article 112 of the Agreement on the European Economic Area. It isn’t at all clear to me that the rest of the EEA will view the argument that “there are too many of your lot in our country, so let us keep them out” in the same light. There is also a big difference between triggering an emergency clause in a contract, when an emergency arises which was unexpected when the agreement was signed, and saying from day one that you want to opt out of a key part of an agreement. And the have-your-cake-and-eat-it brigade also fail to mention that, in addition to Article 112, there is Article 114, which states that

If a safeguard measure taken by a Contracting Party creates an imbalance between the rights and obligations under this Agreement, any other Contracting Party may towards that Contracting Party take such proportionate rebalancing measures as are strictly necessary to remedy the imbalance. Priority shall be given to such measures as will least disturb the functioning of the EEA.

It seems to me that England cannot afford wishful thinking right now, and that those who wish her well need to be crystal clear about the choice it faces, so that there is no mis-understanding on the English side.

I recently published an article on the subject, aimed above all at former Remainers, here. That was a heavily-edited-for-newspapers version of something I originally wrote for this site. Since I use this blog in part as a reminder to myself of what I have written, I reproduce the original blog post below the fold, links and all.

An astonishing dereliction of responsibility

Continue reading “This is no time to go wobbly, EEA edition”

Reformed central bank regulators criticised for being, uh, ‘awake at the wheel’

Three people bid for a house, each using a mix of savings and borrowings; the highest bidder wins. Now suppose each had been prepared to spend more, and each bidder’s bank had extended an additional €100,000 of credit. Nothing changes in the aggregate – one house is bought and sold – except that the buyer has an additional €100,000 of debt (and the seller an additional €100,000 of cash.)

How is that a better overall outcome?

When supply is constrained, credit limits are needed (from a central bank, or internally to the banks themselves) to prevent lending driving up house prices and household debt as borrowers compete against one another for a fixed supply of accommodation. Under boom-time conditions, prices rise to levels Ireland saw ten years ago. Any sensible regulator would seek to put a stop to such a spiral, and should expect to receive the support of politicians, the media and a responsible industry.

But the Irish Central Bank’s mortgage lending controls seem to leave it standing almost alone, criticised by the building industry, the banks, politicians and journalists for being – what? – ‘awake at the wheel’? These controls protect buyers from over-paying. Yet the Central Bank is pictured as punishing the consumers it is protecting. (‘Only the rich can now afford housing’ says the newspaper headlines, but without credit limits only the over-indebted could.)

This is remarkable on many counts.

The Crash is not over, but already many seem to have tired of financial regulation. Denounced for failing to act in the boom, the Bank is now denounced for limiting wasteful bidding wars. Meanwhile, largely uncriticised and indeed not much commented on, local authorities construct elaborate and costly planning rules that increase housing costs. That’s without considering what Colm McCarthy calls (in today’s Sunday Indo) the ‘elephant in the room’: the planning and zoning restrictions that create an artificial housing shortage in the first place. Curiously, we criticise regulations that protect us and not the regulations that harm us.

The media present the lending rules as adjustable but house prices as fixed. The opposite should be the goal of policy. If today’s prices and lending limits require a level of savings impossible for most intending house-buyers to achieve, this means house prices are too high not that regulatory rules are too tough. Do we want everything else to be cheap but the most substantial purchase – housing – to be dear? Perhaps we do; Aidan Regan has recently argued on this blog broadly along these lines. When the number of house owners dwarfs the number of marginal buyers, the intergenerational political economy gets very ugly.

To tackle the housing shortage we should leave bank regulators to do their job, and deal with the policy obstacles that cause so few houses to be built. Don’t tackle one problem by creating a second. And don’t fuss over bank regulation to avoid looking at underlying planning, zoning, intergenerational and NIMBY problems.

A scarcity of accommodation is not solved by lending limits. But house prices are lower, mortgages smaller, banks safer, and taxpayers sleep more peacefully; admittedly miscellaneous middlemen may earn lower fees and journalists have to search elsewhere for a story.

Credit limits protect house buyers when there are more buyers than the kinds of houses they want to buy.

Thinking a little about indexation

The Minister for Social Protection wants to index many social protection payments to a cost of living index as an anti-poverty measure. This makes sense on the face of it, as long as that cost of living index is going up, and as long as the level of benefits fall when the cost of living falls. It’s also worth thinking about the virtues of indexation, as this was one of the main criticisms IFAC had of the fiscal space calculations during the last election.

Let’s say you index benefits to the consumer price measure of inflation.

Here’s what happened to that reading over the longer run.

Screen Shot 2016-07-22 at 11.29.28Just messing about with the idea a little more, imagine we ‘begin’ the Irish economy in year 1 with a CPI reading of 100, and grant benefits of €100. Then we can add in (say) the last 20 years of real CPI data from 1995 to 2015 to get a sense of what would have happened to benefits in a year-on-year basis as a result.

The line is the increase in benefits as a result of the indexation, and the bars are the changes in euros to the benefits as a result of the cost of living increase or decrease, measured on the right hand axis. The excel sheet I used to knock this up is here.

Picture1

Hopefully you can see two things. First, the measure is highly pro cyclical. Precisely when we want benefits to decrease a bit, because the economy is growing strongly, they go up, and when we want benefits to increase a bit to cover the cost of living during a crash, they go down. Second, in recent years inflation has either stagnated, or fallen, so you wouldn’t see a huge increase or decrease in benefits either way. Now you could smooth out some of these effects out with a moving average of, say, 3 years, but this little exercise shows, I think, that it’s worth looking carefully at indexation proposals.

(Updated with thanks to commenter Tony_Eire.)

The housing crisis is all about the politics of debt.

Everyone agrees Ireland has a huge housing crisis. The housing “market”, if one can call it that, is completely dysfunctional. There is a massive shortage of supply, particularly in Dublin, and growing demand. Competitive firms are losing mobile workers by the day. Homelessness is on the rise. Rents are sky rocketing. Dublin house prices are back to silly-levels. The price-quality dynamic is totally out of kilter. Yet there is absolutely no reason why housing “supply” should be restricted.

There are literally thousands of empty properties around Dublin, loads of green and brown field sites, and tons of opportunities for housing development. Dublin is not San Francisco, where there is literally no where to build. The problem is that the banks are not lending. The government is intervening in a belated and piecemeal way. The fundamental question, therefore, is why? This is where economics meets politics. Constrained supply means rising prices. Rising prices makes it possible to manage the debt dynamics of the state. Supply is being restricted. It’s not a coincidence. It’s an outcome of incentives.

Yesterday’s “rebuilding Ireland” report is obviously welcome. However, all the policy focus on social housing and homelessness, whilst important, completely misses the core problem, which is that the banks control the market. The banks control the supply of mortgages and the supply of loans for development. In a housing market, if you control mortgages, property and builders, then you control the outcomes. It’s not in their interest to see a rise in supply. A rise in supply would reduce prices and expose the underlying debt dynamics of the bank’s balance sheets.

This is the real structural constraint facing government.

The banks don’t want anyone to sell under the asset (house) price to ensure that they can maintain their debt problem. If they can’t manage their mortgage debts, then the taxpayer has to step in and bail them out again, which clearly the government does not want to do. The structural problem underpinning the housing crisis is the bank-state nexus.

If NAMA or the banks fire sell housing assets to solve the housing crisis, then all those under performing loans/mortgages will be exposed. The debt dynamics of the banks will be exposed. The government will be exposed. Then the ECB is exposed.  It’s a house of cards and the only thing holding everything together are rising rental and house prices. Those renting (and those who don’t own mortgages) are ultimately picking up the bill for the last crisis, of which they had no part.

Hence, the structural constraint underpinning the housing crisis is a convergence in the incentive structure to maintain sky-high rents and rising house prices. It’s not in the interest of the Department of Finance, the banks, NAMA, and mortgage holders to see a rise in supply and a potential fall in prices. This is not to suggest that all these actors are sitting around a table conspiring to restrict supply. But all these actors are clearly aware that rising house prices means lower debt and more wealth. The politics of debt is about the politics of housing capital.

The real policy solution is radical intervention to fire sale the assets.

Compel the banks to lend for real development. Compel builders to borrow. The objective should be to bring down rental prices and house prices. Let the banks take the hit, then let them pass it on to the government, then let the government pass it on to the ECB. In the end, Ireland will be back to where it started: in a one-to-one negotiation with the European monetary system. Except this time, the Irish government should say to the ECB, tough shit, you pay. Our public policy priority is ensuring proper housing for our citizens as a social right.

This policy response is obviously dreamland. But you get the point.


This blog entry is based on two research papers I am working on: “Housing Capital is Back” and “House of cards: the real politics of the Irish housing crisis”. Most of the data to empirically corroborate the claims I have made can be found either at the Central Bank (the “Financial Summary” statistics pack), and/or in the Ratings Agencies of the Irish banks.

Property development

Ataturk’s Ministers visit Sarajevo

The events of the last few days in Turkey brought back to mind this powerful snippet from Anglo-Irish writer Rebecca West’s account of her travels in Yugoslavia in the 1930s. Nothing to do with economics, and little related to present realities, but a passage that some might appreciate….


“There are thirty thousand Moslems in Sarajevo, and I think most of them were there. And they were rapt, hallucinated, intoxicated with an old loyalty, and doubtless ready to know the intoxication of an old hatred.

We came to the halt at the right moment, as the train slid in and stopped. There was a little cheering, and the flags were waved, but it is not much fun cheering somebody inside the tin box of a railway carriage. The crowd waited to make sure. The Moslem Mayor of Sarajevo and his party went forward and greeted the tall and jolly Mr. Spaho, the Minister of Transport, and the Yugoslavian Minister of War, General Marits, a giant who wore his strength packed round him in solid masses like a bull. He looked as Göring would like to look. There were faint polite cheers for them; but the great cheers the crowd had had in its hearts for days were never given. For Mr. Spaho and the General were followed, so far as the expectations of the crowd were concerned, by nobody. The two little men in bowlers and trim suits, very dapper and well-shaven, might have been Frenchmen darkened in the colonial service. It took some time for the crowd to realise that they were in fact Ismet Ineunue, the Turkish Prime Minister, and Kazim Ozalip, his War Minister.

Even after the recognition had been established the cheers were not given. No great degree of disguise concealed the disfavour with which these two men in bowler hats looked on the thousands they saw before them, all wearing the fez and veil which their leader the Ataturk made it a crime to wear in Turkey. Their faces were blank yet not unexpressive. So might Englishmen look if, in some corner of the Empire, they had to meet as brothers the inhabitants of a colony that had been miraculously preserved from the action of time and had therefore kept to their road.

The Moslem Mayor read them an address of welcome, of which, naturally, they did not understand one word. This was bound in any case to be a difficult love affair to conduct, for they knew no Serbian and the Sarajevans knew no Turkish. They had to wait until General Marits had translated it into French; while they were waiting I saw one of them fix his eye on a distant building, wince, and look in the opposite direction. Some past-loving soul had delved in the attics and found the green flag with the crescent, the flag of the old Ottoman Empire, which these men and their leader regarded as the badge of a plague that had been like to destroy their people. The General’s translation over, they responded in French better than his, only a little sweeter and more birdlike than the French of France, and stood still, their eyes on the nearest roof, high enough to save them the sight of this monstrous retrograde profusion of fezes and veils, of red pates and black muzzles, while the General put back into Serbian their all too reasonable remarks. They had told the Moslems of Sarajevo, it seemed, that they felt the utmost enthusiasm for the Yugoslavian idea, and had pointed out that if the South Slavs did not form a unified state the will of the great powers could sweep over the Balkan Peninsula as it chose. They said not one word of the ancient tie that linked the Bosnian Moslems to the Turks, nor had they made any reference to Islam.

There were civil obeisances, and the two men got into an automobile and drove towards the town. The people did not cheer them. Only those within sight of the railway platform were aware that they were the Turkish Ministers, and even among those were many who could not believe their eyes, who thought that there must have been some breakdown of the arrangements…

We had seen the end of a story that had taken five hundred years to tell. We had seen the final collapse of the old Ottoman Empire. Under our eyes it had heeled over and fallen to the ground like a lay figure slipping off a chair. But that tragedy was already accomplished. The Ottoman Empire had ceased to suffer long ago. There was a more poignant grief before us. Suppose that such an unconquerable woman as may be compared to the Slav in Bosnia was at last conquered this time, and sent for help to her old lover, and that there answered the call a man bearing her lover’s name, who was, however, not her lover but his son, and looked on her with cold eyes, seeing her only as the occasion of a shameful passage in his family history: none of us would be able to withhold our pity”.

Higher Education Funding Links

There have been lots of contributions since the Cassells Report issued. It’s probably worth putting them all in one place. If I’ve missed some, please pop them in the comments.

The Cassells Report itself.

The reaction to the report

Carl O’Brien has a great series of articles on the subject. Here’s one: College funding explainer: The three options to pay for third level

Michael O’Regan: Senators criticise proposal for student loan scheme

The reaction to the reaction

Brian Lucey: Third level financing fails to paint the whole picture

Niamh Hourigan: Student loans will make graduates flee. Face it, tax is the best way to fund third level

Lorraine Courtney: State continues its war on youth, denying them a brighter future

Kim Bielenberg: Facing a higher degree of debt – students could graduate owing €20,000

Darragh Flannery and John Cullinan Study now, pay later? Please read the terms and conditions

Brian Hayes Why this Dáil may actually grasp the nettle of higher education funding