A Policy Offense

Over the past months, the challenges of stabilising the public finances and sustaining the banking system have dominated the macro policy debate.   Unavoidably, the depth of the crisis has put policy making in a defensive—indeed survival—mode.   The first-order issues have been maintaining the ability to borrow and ensuring a working credit system. 

In the months before the next budget, I hope the debate will broaden to focus more on a policy offense to counter the recession.   Even though it is getting harder to be shocked by ever-worsening economic forecasts, this week’s outlooks from the ESRI on growth and unemployment were truly depressing—all the more so since the burden will fall especially hard on young workers, as Liam Delaney has reminded us.   One message that comes through in the slides from Thursday’s ESRI conference is the importance of minimising inflows into unemployment.   It is worth noting that in his presentation at the conference Jaakko Kiander said Finnish fiscal policy was too restrictive in the midst of their “Great Depression;” it took years for employment to return to pre-recession levels.    We should be careful we do not look back later with the same regret. 

On fiscal policy, the government was under obvious time pressure in putting together its emergency budget.   There is no excuse for October’s budget.   A fully formulated—and preferably legislated—medium-term fiscal framework should provide room for shorter-term countercyclical measures.   We should take advantage of the time to have a vigorous debate about how to use whatever fiscal room there might be.     

(I do not mean to suggest that promising policies are not being debated every day on this blog.   A few that come immediately to mind: Paul Hunt’s eloquent arguments on tackling inefficiencies in the non-traded sector and for targeted infrastructural investments in growth sectors; Sean O’Riain’s proposals for development-oriented financing; and Liam Delaney’s emphasis on youth-oriented investments and opportunities.)

On credit policy, Karl Whelan has been the catalyst for an impressive debate on how to sustain the banking system in the face of apparent insolvency.   But I find it surprising that relatively little attention has been given to the customer side of the credit market—both in terms of the demand for credit and the impact of business/household balance sheets on the willingness to supply credit.  

In the international debate, there is a growing attention to the idea of a “balance sheet” recession.   The outstanding feature of such a recession is potential borrowers try desperately to repair balance sheets by curbing their spending.    In addition, the poor state of balance sheets harms the creditworthiness of many of the remaining willing borrowers.   This again suggests there is much to debate on the policy front, from the role of coordination failure in the credit collapse to the potential for targeted tax relief in sustaining investment and employment.   

Battle for the Economy Conference

This London event may interest some readers.
This open summit is an opportunity to engage in a public discussion about the economic crisis with leading economists, business people and policy makers. It will be an opportunity to have a serious discussion about the current economic crisis, with the emphasis on public debate rather than wishful thinking. This summit aims to start a conversation that will move us beyond political soundbites or fantasies of imminent economic recovery and help us get to grips with the political and economic battles ahead.
A range of discussions – from ‘Demystifying the crisis’ to ‘Investing in the future: what could be the new engine of growth for the UK?’ – will seek to open up debate about the economy and about what sort of society we want. Speakers willing to put their arguments about the economic crisis to a public audience, and to face questions and comments from that audience, include: Professor Richard Portes, London Business School; Professor Deepak Lal, UCLA; Professor Erik Reinert, author, How Rich Countries Got Rich … and Why Poor Countries Stay Poor; John Hilary, War on Want; Warwick Lightfoot, former special advisor to Chancellors Nigel Lawson, John Major and Norman Lamont; Claire Fox, director, Institute of Ideas; Professor Emre Ozdenoren, London Business School; Dr Eliot Forster, Solace Pharmaceuticals; Professor Frank Furedi, University of Kent; Parminder Bahra, The Times; Dr Tim Young, University of York; Leigh Caldwell, Inon; Jeremy Sice, SAS Design; Vivien Regan, WORLDwrite; Bruno Waterfield, Daily Telegraph; John Stevens, campaigner for Britain to join the Euro; and Paul Mason, author, Financial Meltdown and the End of the Age of Greed.

For a full list of speakers and sessions see here.

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Lenihan on the ECB and the Guarantee

In my earlier post on the government’s criticisms of the IMF, I left out what was probably the most interesting argument because it raised a number of other issues.

Speaking on This Week on Sunday, the Minister for Finance criticised the IMF’s assessment of the cost of the liability guarantee on the grounds that the guarantee would not be called on. I’ve already noted that this is a somewhat spurious way to look at the cost of the guarantee. However, what was particularly odd about the Minister’s comments was his particular explanation of why the guarantee would not be called upon.

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Shifting ownership of Irish banks

Given the current interest in ownership of the Irish banks, I thought readers might be interested to read about the size distribution of shareholders.

AIB provides the most interesting data, reported in their recently published Annual Report and relating to end-December 2008.

There have been some interesting shifts in the past year.  First of all, shareholders in the Republic (including pension funds etc.) now hold 41 per cent of the shares, up from 37 per cent last year.

Second, in the face of dramatic declines in price and increase in volatility, the number of AIB shareholders has increased by over 10 per cent or 10,000 persons.  Almost all of the increase relates to the Republic, and almost all hold less than 5000 shares.  (Today, the shares closed at €0.81).  This confirms what was known anecdotally, namely that lots of middle income people thought it worth taking a flutter on bank shares given the novelty that they were only worth cents.  They have bought these shares from foreign institutions.

For, although there over 90,000 AIB shareholders in total, of whom 76,000 in the Republic, fewer than 5000 shareholders hold more than 10,000 shares, and just 384 hold more than 100,000 shares.

Bank of Ireland had about 80,000 shareholders when it last reported the number, about a year ago.  (We’ll likely see a similar pattern to the changes when the March 2009 figures are published.)

A look at Irish Life and Permanent‘s reports (giving shareholders at end March 2009) shows a similar, though smaller trend: they now have over 135,000 shareholders up about 1%.  All but 10,000 of them have fewer than 1000 shares each, but most of the newcomers seem to have between 1000 and 10000).

Anglo Irish Bank had far fewer shareholders — fewer than 20,000; just over 100 of them held 85% of the total shares between them.


Here are the estimates from Davy Research for the different types of property loans held by Irish banks. (Access, however, limited to customers of Davy.)

Their summary:  “Gauging the appropriate haircut is a function not just of the asset value; rather, it also hinges on the original loan to value, the vintage of the loan and the provisions made. Our analysis suggests a range of mark to market haircuts: from as low as 5% for loans backed by UK commercial investment property to 44% in the case of loans backed solely by Irish development land.”

Bottom line in terms of state ownership:   The base case delivers ownership by the state of 78 percent for AIB and 69 percent for Bank of Ireland.

Unemployment Up to 11.4% in April

Today’s release shows that the standardised unemployment rate, which is based on the Live Register, rose to 11.4% in April from 11% in March. 

I’m tempted to greet the four-tenths increase as a sign that the pace of slowdown is moderating relative to the disastrous increases observed in January and February.   This is pretty cold comfort—this is still consistent with an annualised pace of increase in the unemployment rate of almost 5%—but I guess second derivatives have to turn negative before we reach a global maximum. 

On the whole, though, I still reckon we’re looking a double digit rate of decline for average-over-average GDP this year.

Sarah Carey on NAMA and Nationalisation

Sarah Carey’s article in today’s Irish Times is worth reading because it is perhaps the most articulate version yet of the key argument that tends to convince people that nationalisation is a bad idea and that NAMA and limited state ownership is the way to go.  The government has made a series of arguments against nationalisation but it’s hard for them to bluntly say “we don’t want to own the banks because we’re scared we’ll make a mess of them.”  But an opinion columnist can and this is the essence of Carey’s argument.

I think Sarah is too pessimistic about the long-term performance of semi-state bodies in Ireland and that, in any case, there’s little point in applying these analogies to businesses for which state ownership is an explicitly temporary measure. 

Beyond that, at the risk of making Sarah’s head hurt a bit more, let me put the case for why she should trust her instincts and support the college boys.

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Global Finance Academy Conference at UCD



at the University College Dublin Michael Smurfit Graduate Business School

May 27, 2009

The Global Finance Academy at the University College Dublin Michael Smurfit Graduate Business School would like to announce the 3rd Global Finance Academy Conference. The conference is a one-day event and our speakers include Don Bredin, Claudio Loderer, Philip Molyneux, Maureen O’Hara, Lucio Sarno, and Matthew Spiegel.

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Major Public Economics Conference at NUIG

The 10th Annual Meeting of the Association for Public Economic Theory takes place at NUI Galway between June 17th and June 20th this year. It will feature over 370 presentations from many of the most prominent economists working in public economics. Presenters include Dennis Mueller, Richard Cornes, Ted Bergstrom, Masimo Morelli and Serge Kolm and there will be plenary talks from Ehud Kalal, Hubert Kempf and Andres Mas-Colell. A preliminary programme is available on the conference web site.

The first registration deadline is May 5th after which registration fees increase by €50. There is a generous discount for students. Registration can only be completed through the conference web site.

Please contact either of the local organizers – Ashley Piggins (ashley.piggins at nuigalway.ie) or Brendan Kennelly (brendan.kennelly at nuigalway.ie) if you have any questions.

Emmanuel Saez – Bates Clarke

This years Bates Clarke medal was awarded to Emmanuel Saez. Details of the award are below. Below that is  his IDEAS page. The work that Saez is doing across areas like tax, social interactions, information provision and so on provides many good ideas that have relevance to policy. The award committee cite his contributions to areas of public economics like optimal tax theory, measurement of income distributions, field experiments in financial behaviour among other areas.



Fine Gael Health Plan

Having been critical of Fine Gael’s “stimulus” plan a few weeks ago, I thought I’d be fair and note that FG’s new health plan — with Dutch-style universal private health insurance as its centrepiece — strikes me as a useful contribution.

With increasing funds for the health service simply not possible over the next few years, we need to figure out how to run our health system in a far more efficient way, and this proposal suggests one way of going about this.  Then again, I’m not at all an expert in health economics.  I’d be interested to hear from those who are about what they think of this plan.

The second draft of history

Economic historians and others interested in the Great Depression still turn to the economic publications of the League of Nations as a basic source for understanding the economic catastrophe of the 1930s. While I don’t want to give anyone in Washington DC stage fright, the publications of today’s international organisations, such as the IMF’s World Economic Outlook which was published in full last week, will also serve as a first port of call for the historians of decades hence. So: how are they shaping up?

Extremely well, is my reaction after having finally given the April WEO the attention it deserves. This is essential reading for people seeking a global overview of the crisis,  and advice as to how to get out of it.

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Unemployment among the Young

Unemployment among the young is something that has been under-discussed in the debate so far. For example, in about a month from now, the first of this year’s college students will start finishing up in Ireland. Last year the numbers read approximately 20,000 undergraduates each from the Universities and IT’s, 13,000 postgraduates from the Universities and approximately 2,000 from the IT’s. Thus, with the assumption that this year is the same as last year, there will be about 40,000 undergraduates and 15,000 postgraduates coming out of college and its past time to start a debate about policy for this group. Given that there is currently a public sector embargo on hiring and private sector hiring is so weak, the options for a lot of this year’s graduates do not look good. My guess is that over half the undergraduate students will go on to postgraduate but the insustainability of this as an employment response should be obvious if the labour market is not set to recover for the next few years.

HEA Stats

The recent budget packages are essentially a combination of back-to-work incentives, training schemes, incentives for training, extra third level places and so on. The total budget allocated for these measures is 128 million and they look like a very partial response at best, albeit a start.

Budget Jobs Response

Bell and Blanchflower released a paper earlier in the year that is a must-read for any policy-maker who reads this blog and is interested in developing policy to immediately rectify unemployment among young people. The article stresses the importance of not allowing young people to enter into early periods of unemployment and the potential long-run economic and psychological costs of not acting. It offers proposals such as job-sharing, mandatory training/schooling until age 18, development of “shovel-ready” labour intensive projects and so on. I think that we urgently need a policy document from a selection of government departments on how a package of such proposals could be rolled out, given the current budgetary constraints. I know many on this blog may argue that pricing ourselves back into international competitiveness is the only sustainable employment response, but in an environment with such low global demand it would be foolish not to think of urgent active responses for both graduates and non-graduates.

Bell and Blanchflower Article

Monetary Policy and the Irish Central Bank

On last night’s Prime Time report on quangos and inefficiencies in the public sector, reporter Donagh Diamond said:

The introduction of the euro abolished a major function of our central bank, the devising of monetary policy.   So we wondered where all the staff went.   Remarkably, the CB tells us that on the creation of the euro “The functions of the CB remained largely the same” clearly indicating that no staff went anywhere. 

As a former employee of the Central Bank, I have regularly had this point put to me over the past number of years—“What does the Central Bank do now?”    But this question, and Donagh Diamond’s comments, are based on a highly flawed understanding of how the ECB’s monetary policy operates.  

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NAMA Website

There may not be any legislation yet but NAMA has a website.  It provides an example of how NAMA will buy loans from the banks using a “purely illustrative” example of a 25% discount.  It has been widely reported that AIB would be selling €30 billion in loans to NAMA.  A writedown of €7.5 billion would wipe out essentially all core Tier 1 (shareholder) capital, so this is an interesting illustrative example.

Update: Patrick correctly points out that the illustration is of a €25 million writedown of a €65 million loan for a property originally worth €100 million.  So indeed it’s a 38.5% discount. I know it’s just an example but it’s interesting all the same.