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.