Bacon Gives Bacon Plan Thumbs Up

excellent post by Karl Whelan.This false veneer of objectivity stinks and harks back to the glory days of Bertie

I know what you mean Karl. I heard him on Radio 1 this morning congratulating Lenihan on a great plan – I nearly slammed my head on the wheel!
More annoying was his dismissal of nationalisation. He seemed to argue that this plan offers the taxpayer more distance from the bank and further risks. This seems a curious argument to me – is he saying that after taking the hit for them we should hold them at arms length? Thus avoiding reaping any future benefits (however unlikely) or further losses (though it appears the govt actually is ready to take another hit)…
I’m sure I’m missing something here…. I mean, I hope I’m missing something here…

@PaulH (See LiamD, behavioural modification works…) : the government really really really dont want to nationalise. That would be for political reasons. So the economic logic will not trump the political here.

Karl,

What was it that George Lee said a few days back on RTE radio…

George Lee was asked what caused the current economic mess, he started his reply by saying “Thats a very difficult question to answer and to still keep working for RTE”.

Now if that weren’t a very unusual joke but a rueful comment on the national broadcaster then you have your answer as to why the small details of authorship are forgotten.

@Jer

Much obliged if you have a soundclip (or more specific reference) for that.

Thanks LorcanRK

RTE receives a subsidy of 210 million euro in 2009. The days that radio and television provided a public good are long gone.

Don’t have an answer to this, but, as Brian Lucey pointed out, what’s going on here is politics – not economics.

The bond holder guarantee is explicit. The government has both taken out a home equity line of credit and resorted to credit card financing in order to keep the bond holders happy. The next stop will be the pawn shop. I have attempted in vain to locate any serious discussion of this issue. How is it possible that the nation’s economic efforts will be harnessed to repay those who financed an episode of which John Law would be proud? Has there been any debate on the alternative?

If the fear is that the bondholders would refuse to buy our sovereign debt out of spite after losing (capital, their reputation within their respective institutions and their bonus) from a write down of our esteemed banks’ bonds, then we need to assess that risk in an objective manner as opposed to adopting it as a truism (particularly when it has been advanced by those who have a vested interest in proceeding with the NAMA).

Government debt that is raised solely for the purpose of financing budget deficits over the next few years (as opposed to also funding NAMA and providing the inevitable equity infusions into the banks following the write downs they will be forced to take after hocking the portfolios of shopping centers, office blocks etc. at knockdown prices) would be inherently less risky and of higher quality than an alternative scenario where the government proceeds with the NAMA and allocates its remaining (and rapidly dwindling) borrowing capacity to both purchase these portfolios and provide for its expenditure requirements. In other words, bondholders will face less political risk under the former scenario. As such, in attempting to gauge the impact that its decisions will have on its current and future creditworthiness, the government needs to acknowledge that foreign investors will attach a political risk premium to our sovereign debt if they judge that the government is channeling too great a proportion of our national output towards the repayment of bondholders at the expense of the provision of health, education, infrastructure and welfare.

Sadly, rather than facing up to this reality today, the government appears set to continue with its tried and trusted approach of formulating policy on the hoof. I expect that the NAMA will be in place before the next election and that a few wise words from the mandarins in Merrion Street will deter Minister for Finance Bruton from tinkering with it. Inevitably, however, budgetary arithmetic will bring the show to a halt. At that point, following the transfer of 20 odd billion to the banks and, by extension, the bondholders, the unhappy minister will have to face reality as there will be no more “fat” to cut from the economy and our credit card limit will have been reached.

Good point Brian. I don’t have the exact figures but I do not believe that the government can view the 27b plus tier 2 amount as a cushion. The banks have to maintain their capital ratios at 8% (and, quite possibly higher going forward given the actions of the British government in capitalising RBS et. al.), so, as and when these ratios are approached, either directly by borrowers defaulting or indirectly by the purchase by NAMA of portfolios at prices below the current carrying levels, then the government will be forced to inject additional funding.

It would be interesting to know just who the true beneficiaries of all of this largesse are, credit insurers perhaps, hedge funds who wrote credit protection on bank debt? The tax payers should at least know who they will be working for going forward. Similarly, those voters that rely on the state for services should know which interests the government has deemed to be more deserving.

William Buiter provided a good analysis of this topic on his blog yesterday.

Is this the same Peter Bacon who was a director at Ballymore properties one of the largest property developers in the state?

http://www.independent.ie/unsorted/features/ballymore-aims-for-flotation-in-five-years-685182.html

My apologies for also hijacking this thread. I hope that my current assignment will distinguish me from Liam Delaney.

@ Liam Delaney. My views about the pseudo-scientific nature of the economics profession are mild in comparison to what some of your peers think.

Paul deGrauwe argues in a piece entitled “Keynes’ savings paradox, Fisher’s debt deflation and the banking crisis,” that modern macro economics is irrelevant

see:

http://www.eurointelligence.com/article.581+M5a44f3fb3ec.0.html

Similarly, Professor Buiter, in “the unfortunate uselessness of most ‘state of the art’ academic monetary economics” is scathing.

Some samples:

Indeed, the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of time and other resources.

OR

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck.

OR

In both the New Classical and New Keynesian approaches to monetary theory (and to aggregative macroeconomics in general), the strongest version of the efficient markets hypothesis (EMH) was maintained. This is the hypothesis that asset prices aggregate and fully reflect all relevant fundamental information, and thus provide the proper signals for resource allocation. Even during the seventies, eighties, nineties and noughties before 2007, the manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. eduction. But most of the profession continued to swallow the EMH hook, line and sinker, although there were influential advocates of reason throughout, including James Tobin, Robert Shiller, George Akerlof, Hyman Minsky, Joseph Stiglitz and behaviourist approaches to finance. The influence of the heterodox approaches from within macroeconomics and from other fields of economics on mainstream macroeconomics – the New Classical and New Keynesian approaches – was, however, strictly limited.

To read more, go to:

http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/#more-667

Or if you’re inclined you can go to http://johnquiggin.com/ where he has some lively posts beginning with the titles Refuted Doctrine #—

Also not to worry Richard. I don’t work for the public service. I am infact one of the hundreds of thousands of low paid workers in this country who may lose my job (although it won’t be about my views), but has decided not to lay the blame at the door of the public service. Because quite simply, it is not their fault.

Nor is it the fault of those on Social Welfare, or those who borrowed ridicululous amounts of money with paltry incomes for outrageously priced homes located at outrageous distances from their workplaces, nor those who have to pay a second mortgage for the private sectors market failure in childcare provision, or those who sit on trolleys in our developing world healthcare system. There is at heart an intellectual failure: a belief that we’re not masters of our own fate, but that of some sacred entity called the markets, to which we owe allegiance and should surrender all public goods. It’s a fallacy, and a dangerous one. If you want to know how dangerous, keep looking out the window.

@Colm
I am with you on this. Hence the bias in the media. They clearly could not find anyone else to agree!

They are desperate to sell this plan. It will not work but they want it to keep their backers in business.

As a tax inspector, I and my colleagues would often find a bank loan, off balance sheet, in the course of an investigation into a cheating taxpayer. This would be offered as a last resort, to explain a large accumulation of assets on a newly drawn up balance sheet. When tracked down, in those cases where the loan came from a commercial bank, (and not a bartender in New York!) there was often another asset, off balance sheet, upon which this loan was secured. Thus the statements of affairs, personal and business balance sheets, combined, for the period under investigation, would now show a dramatic increase in wealth, unexplained by the declared income and gains returned, to the kindly inspector of taxes, by the cheat. Oooops! The cheat was willing to take on a loan and pay loan interest, while depositing funds with the lender. Not tax efficient, as the interest was often not claimed, but done to hide the real source of the capital. The bank was a winner in the scenario and would be able to offer the cheat the lowest rates as it held secret security. In essence this was the infamous **** scam that was in the headlines in the 1990s. The bank had facilitated money laundering for many clients. It probably was not alone in this, as staff often leave to go to another bank….. and the failed avoidance aspect was retailed in London. Needless to say, but I shall say it, the licence of the bank was safe and staff at the bank were never threatened with prosecution, despite ample evidence.

The many backers of this government will be found to have assets in the banks and elsewhere that could be called upon to satisfy liability to the banks, that are not known to the auditors of the banks. Shadow banking anyone? Who better to carry it on than the banks!
By dumping the “known” problems into NAMA, the backers may be able to escape with assets intact, even if a violation of bankruptcy laws. Nationalization alters the rules for staff quite a bit as staff may be paid to keep quiet. Not many staff need to be involved, but a nationalized bank (but not the old ACC!) usually doesn’t facilitate money laundering.

@Karl
Great post! Very good insight. They could not get anyone else to back it? Why such an obvious lack of balance? RTE being brilliant perhaps, preferring the pointer to shanigans than any other “source”? I am sure they might have found an economist to back it. After all, there were few warnings from “economists” about the bubbles.