Archive for June, 2009

2009:Q1 Quarterly National Accounts Release

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Tuesday, June 30th, 2009

The latest Quarterly National Accounts release from the CSO is available here. The release has been poorly reported by the media outlets that I have seen thus far. The Irish Times reported that “The economy shrank by 8.5 per cent in the first three months of 2009” and this interpretation was repeated on the RTE 9 o’clock news.

The correct interpretation is hard to get wrong if you just take a look at the first page of the release, which says “Compared with the corresponding quarter of 2008, GDP at constant prices was 8.5 per cent lower.” So 8.5 percent is the cumulative decline over the past year rather than the decline that occurred over the first three months of the year.

The best read we have on what happened to the economy during the first quarter comes from the data on seasonally adjusted real GDP (though this is of course imperfect, given large revisions and uncertain seasonal factors, it’s the best we have.) This series declined 1.5 percent during the first three months of the year, not nearly as bad as the revised 5.4 percent decline that occurred during the fourth quarter of last year. So, while the year-over-year declines are unprecedented, RTE’s reporting of the story as implying the economy was contracting at an unprecedented pace during the first quarter is not correct.

In terms of forecasting for the year as a whole, Irish media and forecasters tend to focus on the year-average over year-average figure for GDP growth (averaging the four quarters of 2009 and comparing that to the average of the four quarters of 2008). An absolute best case scenario would be one in which GDP stays flat at its 2009:Q1 level for the rest of the year (so that technically, we would hit the bottom of the recession). This would imply a year-average-over-year average for 2009 of -5.8%. A more realistic scenario would see further declines on a par with the first quarter’s throughout the rest of the year. This would produce a year-over-year figure of -7.9%.

Today’s figures are actually a bit better than I would have expected in light of the big jump in  unemployment during the first quarter. I now think we are slightly more likely to avoid a double digit decline in average over average GDP growth than I did beforehand.

The other indicator that most people focus on, GNP, perfomed far worse in the first quarter. Real GNP was down 12 percent relative to year earlier, declining by 4.5% in 2009:Q1 compared with a 3.4% decline in 2008:Q4. The CSO discussed the different pattern of this indicator as follows:

The estimate of GNP is derived by adjusting GDP for income flows between residents and non-residents. The timing of these flows can be variable. They include, in particular, the profits of foreign owned enterprises which increased by some €713m between Q1 2008 and Q1 2009. The increase, in this quarter, in the net factor income flows is also affected by (a) reduced credits (inward flows),compared to Q1 2008, to Irish outward direct investment enterprises and (b) increased interest payments on government debt. As a result, the decline in GNP was more severe than that in GDP.

Clearly, item (b) here is a pattern that is going to continue, though I’ve no insight into item (a). It seems to me that forecasting GNP is more difficult than forecasting GDP, so I won’t try, though obviously this series seems more likely to record a year-aveage-over-year-average decline into the double digits.

A sound funeral plan can prolong a bank’s life

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Tuesday, June 30th, 2009

Anil Kashyap has an interesting article on the FT website about the design of ‘funeral plans’ for banks: you can read it here.

Class and Employment Decline

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Tuesday, June 30th, 2009

It is worth taking a closer look at the Quarterly National Household Survey results from last week. The difference between the public and private sectors has attracted some comment but there is much more going on here. In particular, the major trend that stands out is the disastrous collapse in working class employment with growing differences between the position of those with third level education and those without. The need for serious commitments in enterprise and employment policy, education and training policy, and housing/ mortgage support is clear.

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The ECB’s Injection of One-Year Liquidity

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Tuesday, June 30th, 2009

Last week saw the ECB undertake a massive injection of one-year liquidity.  Willem Buiter provides an incisive analysis here.

Credit Availability: Capital Scarcity is not the whole story

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Monday, June 29th, 2009

Oliver O’Shea writes on credit availability in Ireland (originally published in Irish Times on June 22nd but not available online):

OSHEAcreditjune22

Bad Banks and Recapitalisation

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Monday, June 29th, 2009

This working paper by Dorothea Schäfer and Klaus F. Zimmermann “Bad Bank(s) and Recapitalization of the Banking Sector” is interesting in the context of the NAMA debate. Paper is here.  Abstract below:


With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value – assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets’ current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank’s losses, while profits would be distributed to the distressed bank’s current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.

BIS Annual Report

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Monday, June 29th, 2009

In recent years, the BIS annual report has been to the forefront in terms of accurate analysis of the global banking and financial system.  Its latest report is available here, while a summary is here.

Principles of Household Debt Restructuring

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Monday, June 29th, 2009

The IMF has a new Staff Position Note on the role of government intervention in improving the efficiency of household debt restructuring: you can read it here.

Innovation Taskforce Appointed

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Monday, June 29th, 2009

The Irish Times reports that

TAOISEACH BRIAN Cowen has announced the appointment of an innovation taskforce to advise the Government on its strategy for positioning Ireland as an international innovation hub and to assist in making the “smart economy” a reality.

The taskforce to assist in making the Smart Economy a reality doesn’t contain an economist of any sort, smart or otherwise.  This seems to me to be a pity.  Economists tend to think about the effect of policies on the economy in a somewhat different ways to scientists, civil servants and CEOs and could have had a useful influence on such a taskforce.  (Hey, if we’re not for ourselves, who else is going to be?)

In particular, economists tend to think about government interventions in a more systematic way (What’s the market failure that these policies are addressing? Externalities? Natural monopoly?) and to better see the linkages between new initiatives and past industrial policies.  Since there won’t be any economists advising the government on this taskforce, I would encourage participants in this blog to come forward a bit more to discuss these issues here.

One aspect of the current Smart Economy strategy for which, in my opinion, the likely economic impact is being exaggerated is the link from university innovation to start-up firms and jobs.  Policies to encourage university R&D and its commercialisation may change the type of jobs in Ireland but they are unlikely to have much effect on the number of jobs.  Similarly, the statistics on start-ups show that failure rates are very high, so as much it’s nice to talk about starting up a Nokia here in Ireland, the truth is that this process is highly random.

More generally, given the heavy emphasis in recent policy statements on university innovation and spinoffs, it is important be realistic about the role of such activity in other advanced economies.   Engineer Richard K. Lester from MIT is an international expert in the interactions between science and the economy.  Here is an interesting presentation titled “A Framework for Understanding How Higher Education Affects Regional Growth” in which he discusses some common “myths” with regard to university innovation.

Finally, here’s a link to an edition of the journal Capitalism and Society, which has a paper on the Oxford model of commercialisation as well as interesting comments from Lester. 

The papers are behind a pay firewall which many of you won’t have access to, so here’s a brief excerpt from Lester’s comments:

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Lenihan on the Banks at InterTradeIreland

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Saturday, June 27th, 2009

Thanks to Philip for posting about the video of the the InterTradeIreland event. I was interested in the video footage because Ciaran O’Hagan had, justifiably, raised a question about my post last week about the Minister for Finance’s reported comments at this event. The Irish Times article I pointed to had partially summarised the Minister’s statement and Ciaran questioned whether we could really be sure that they had gotten it right.

Well, having looked at the video, I can say that the Times story accurately reflected what the Minister said. In addition, the Minister’s comments on the banking situation were actually far more interesting than reported by the Times, so I took them down and have repeated them below (on the video these comments start at about 8.50 in).

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InterTradeIreland Economic Forum – Global Outlook

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Friday, June 26th, 2009

The first InterTradeIreland Economic Forum – Global Outlook took place in Dublin on the 18th June 2009. You can see the presentations here.

New Energy Policy Report

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Friday, June 26th, 2009

The Irish Academy of Engineering has released a report here which argues that enegy investment plans should be scaled back, and expresses scepticism about our high renewables targets.

In Praise of the German Fiscal Law

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Friday, June 26th, 2009

Ashoka Mody leads the IMF’s work on Germany as well as on Ireland.  He writes in today’s FT in praise of the German fiscal law: you can read it here.

AIB Debt Buyback

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Friday, June 26th, 2009

I’ve been looking into the AIB debt buyback program, details of which were announced on Monday (Irish Times story here.)  Why in God’s name would I be doing that during a rare sunny week in this country? Well, between the state guarantee and NAMA, pretty much everything the banks do these days has implications for the taxpayer, so it’s worth taking a look at.  That and the fact that I’m a nerd. Wonky corporate financey post below the fold.

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IMF Conference Call Transcript

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Friday, June 26th, 2009

The transcript of the conference call with Ashoka Mody is here.

Lucey on the IMF

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Friday, June 26th, 2009

Brian weighs in on the IMF and the banking crisis in this article in today’s Irish Times.

Employment Gains and Losses by Sector

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Friday, June 26th, 2009

The National Accounts suggest that the activity peak was about Q2 2007, so the last reading on pre-recession employment was about Q1 2007. The QNHS published yesterday gives Q1 data for 2007, 2008 and 2009 on the new basis. Figs in 000 are from the sa Table 3.

Sector                    Q1 07      Q1 08     Q1 09     % Chg 09/07

Agriculture              108.9       116.9     102.7           -5.7

Industry                 305.3       288.1     268.6          -12.0

Construction           270.7      256.6      184.0           -32.0

‘Public Sector’         453.2      463.7      480.7            +6.1

All Other                963.1     1013.6      945.3            -1.8

Tot Employment     2101.2    2138.9     1981.3            -5.3  

Unemployed             98.5       109.9     223.4          +126.8

Labour Force         2199.7     2247.6    2203.0            +0.2

‘Public Sector’ is the sum of NACE categories O, P, Q, Public Administration, Education and Health, and includes over 100K not formally public servants. Some commercial Semi State employees are in Industry. The most dramatic collapse is in Construction, down 32%, with Industry down 12%. The OPQ ‘Public Sector’ has grown 6%,  and is the only sector exempted from the downturn thus far. The quarterly peak was actually in Q4 08 and there are now recruitment curbs and budget cuts, so this sector may turn negative through 2009. But to date, the OPQ sector has added 27,500 since the downturn started (+6.1%) while the rest of the economy has shed 147,400 (-8.9%).

The propagation of the employment contraction out of construction in 07 into the rest of the private economy in 08 is clear. The QNHS unemployment rate grew from 4.5% to just 4.9% through 07, but soared to 10.2% in the four quarters to Q1 09. Since the most sharply-contracting sector has a mainly male workforce, an interesting effect is that 45.1% of the employed workforce is now female, an all-time record. Labour force growth has ceased and the participation rate has been dropping steadily for a year. In total employment terms, the fastest decline was in the most recent quarter, and with probably not a single sector now expanding, the Q2 figures will hardly bring much joy.

National Competitiveness Council Report

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Thursday, June 25th, 2009

The National Competitiveness Council is a social partnership body set up in 1997. It “reports to the Taoiseach on key competitiveness issues facing the Irish economy and makes recommendations on policy actions to enhance Ireland’s competitive position.” As with all such bodies, the Council members are the usual smorgasbord of trade unionists, business and financial interests and civil servants, chaired by a safe pair of hands in the form of a former senior civil servant.

Today, the NCC released a report titled Getting Fit Again: The Short Term Priorities for Restoring Ireland’s Competitiveness. You can find it here.

The report makes various recommendations to the government. Some of them—like introducing a property tax, reforming the public sector and, uh, resolving the banking crisis—are generic and would be agreed with by the vast majority of economists and other bodies advising the government. A picky person like myself will find something to disagree with (such as the recommendation to prioritise capital spending) but most of it is fairly unobjectionable.

But that’s the problem. By and large, the report looks and reads like exactly what you’d expect from a body of this type. It’s a glossy and somewhat bland document that does not in any way challenge entrenched government positions (for instance, the document regularly pauses to praise the Smart Economy plan, which most informed economists that I’ve spoken with consider to be an excellent example of Emperor’s New Clothes).

There’s plenty of evidence to show that I’m not the world’s biggest fan of the Blueshirts. But on this issue, I was reminded of a passage from their Streamlining Government document. The FG document pointed out that social partnership

has given rise to the creation of new state agencies. For example, the desire of unions to show that they were using the social partnership system to assist their members who could not afford a home during the housing boom gave rise to the Affordable Housing Partnership (AHP). Unfortunately, it has not given rise to many affordable houses.

In a similar vein, business and corporate interests were given the National Competitiveness Council (NCC) so that they could tell their members that the social partnership process was being used to address Ireland’s loss of economic competitiveness. In reality, our competitiveness has continued to decline. When it comes to housing and competitiveness, we do not need more agencies, what we really need is the right policies and ministers who will to implement them.

The NCC believe the government should cut current expenditure. I reckon that eliminating their budget would be a good place to start.

Job Subsidies and Stimulus

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Thursday, June 25th, 2009

One point I had meant to make in yesterday’s post about job subsidies but forgot to was the following.  Beyond the fact that these programs are expensive and known to be ineffective at reducing unemployment, it remains the case that, whatever agreement the government comes to with the unions, the fiscal situation remains the same (I am discounting arguments here that these schemes pay for themselves because we know they don’t.) I doubt if the government will change its plans for the budget deficit by one cent if it adopts this plan.

So if we spend €250 million (or a €1 billion) on these schemes we will undoubtedly have to find a corresponding €250 million in tax increases or, more likely, spending cuts to offset them.  These measures will themselves have a negative effect on aggregate demand and thus unemployment.

This comes back to the point I made in my post on stimulus. In the current environment, spending measures like this need to be evaluated according to balanced-budget multipliers (i.e. factoring in the negative effects of the taxes that need to be raised or other spending that needs to be cut to pay for them.)  With so many difficult cuts in public spending ahead of us, why put ourselves deeper in the hole by adding an extra €250 million (€60 for every man, woman and child in the country) just to pay for a program that doesn’t help much.

Political Science Fights Back

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Thursday, June 25th, 2009

There is a consensus that the practitioners and discipline of economics have been key beneficiaries of the financial and fiscal crises.  The views of leading economists as to where we are and what we should do are widely sought across the media and within government. A conference organised at TCD earlier this week on the issue of political reform was part of a deliberate effort by political scientists to demonstrate the relevance of their discipline and the Irish Times has been publishing opinion pieces and articles drawing on the conference . Earlier in the week UCD’s John Coakley argued that informal institutions (in the form of political culture) have significantly shaped (and restricted) the state’s capacities. Today’s piece by Neil Collins of UCC argues that there has been a striking neglect of the potential of formal institutions in shaping effective governance. He concludes that ‘It is time for a rebalancing of academic attention from the economic to the political agenda.’

As an outsider to both disciplines it is striking that both have a good deal to say about the way that institutions matter in shaping both expectations and capacity for action. I am led to think that if a rebalancing is required then it might be towards thinking more about the way that formal and informal institutions limit what can be achieved (and deliver unintended consquences), but that a better understanding of those limits might support modest reform proposals which more effectively link the specification of desirable outcomes to the mechanisms through such outcomes might be reasonably be expected to be achieved.

The IMF and Institutional Reform in Ireland

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Wednesday, June 24th, 2009

The IMF report highlights two areas for institutional reform.  This is important, since institutional reform can be helpful not only in resolving the current crisis but also in preventing future crises. In particular, the IMF report advocates:

1.  A special bank resolution regime. “Such a regime would recognize the unique role played by banks in the economy and give the authorities the power to quickly transfer assets and deposits to another institution (a purchase-and-assumption transaction) or to establish a bridge bank (a new limited life bank into which the old bank is transferred to facilitate its sale).”

2. A statutory fiscal rule. “In this regard, a fiscal rule can create the basis of a public commitment to fiscal prudence. This would be valuable for navigating the ongoing politically-sensitive consolidation and maintaining long-term fiscal policy stability. In the context of the European Union’s Stability and Growth Pact, a statutory commitment to a medium-term objective of close to structural balance would be appropriate. This would need to be supported by a medium-term expenditure framework that outlines a detailed time path of expenditure reductions. Transparency and mechanisms to ensure the review of these objectives would limit the risk that they are diluted. While the authorities were supportive of such a rules-based framework, they were less sure of how quickly it could be implemented.”

Buiter on Reform of the Financial Sector

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Wednesday, June 24th, 2009

Willem Buiter has an interesting posting on the re-design of the financial sector here.

Competitiveness

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Wednesday, June 24th, 2009

Pages 9-13 of the report contain an impressive array of data showing indications of Ireland’s falling competitiveness. They also indicate that the IMF team and the Irish authorities disagreed about the extent of the competitiveness problem, with the Irish being more optimistic (due to our falling wages). We all agree, I presume, (and the IMF agrees) that to the extent that our nominal wages fall, we will become more competitive. But, it would be nice to have more data on the extent to which this is happening, in Ireland and elsewhere. As the IMF points out, you can’t just assume that wages are not falling in any of our competitors (and that is even leaving aside the issue of nominal exchange rate changes). Good comparative quantitative evidence (as opposed to anecdotes) would be nice: does anyone know of any?

IMF Report on NAMA and Nationalisation

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Wednesday, June 24th, 2009

One of the classic techniques of government spin-doctoring is to brief the press prior to a bad news announcement to the effect that the announcement is actually good news.

Today the Irish Independent reported that the soon-to-be-released IMF Article IV staff report enthusiastically praises the government’s approach to the banking crisis. The Indo reported that “the IMF says the Government is right in the action it has taken on the two key areas of banking and the public finances …  The IMF backs the setting up of the National Asset Management Agency … It says NAMA offers the chance of taking bad assets from the banks, which is a precondition for their return to health. And the IMF agrees NAMA can be self-financing”

Sounds like a strong endorsement for the govenment, huh? Well, the report has now been released.  It has lots of interesting stuff in it, which I’m sure our contributors will have more to say about later.  Naturally, however, I was drawn to page 19 of the report:

25. Staff noted that nationalization could become necessary but should be seen as complementary to NAMA. Where the size of its impaired assets renders a bank critically undercapitalized or insolvent, the only real option may be temporary nationalization. Recent Fund advice in this regard is: “Insolvent institutions (with insufficient cash flows) should be closed, merged, or temporarily placed in public ownership until private sector solutions can be developed … there have been numerous instances (for example, Japan, Sweden and the United States), where a period of public ownership has been used to cleanse balance sheets and pave the way to sales back to the private sector.” Having taken control of the bank, the shareholders would be fully diluted in the interest of protecting the taxpayer and thus  preserving the political legitimacy of the initiative. The bad assets would still be carved out, but the thorny issue of purchase price would be less important, and the period of price discovery longer, since the transactions are between two government-owned entities. The management of the full range of bad assets would proceed under the NAMA structure. Nationalization could also be used to effect needed mergers in the absence of more far reaching resolution techniques.

26. The authorities prefer that banks stay partly in private ownership to provide continued market pricing of their underlying assets. They disagreed with the staff’s view that pricing of bad assets would be any easier under nationalization. They were also concerned that nationalization may generate negative sentiment with implications for the operational integrity of the banks. Staff emphasized nationalization would need to be accompanied by a clear commitment to operate the banks in a transparent manner on a commercial basis. In particular, nationalized banks should be subject to the same capital requirements and supervisory oversight as non-nationalized banks. And, a clear exit strategy to return the banks to private operation would be needed.

What do people think? A ringing endorsement of the government’s approach?

Job Subsidy Plan “Announced”

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Wednesday, June 24th, 2009

The long-mooted job subsidy plan appears to be about to happen, though as is often the case in Ireland, the public can only learn about this through leaked details from social partnership talks, rather than through the publication for discussion of detailed government proposals.

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Rodrik on Capitalism

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Tuesday, June 23rd, 2009

There are many outstanding websites where universities make available the full video and notes from major guest speakers. Indeed, this is becoming increasingly the norm in good institutes and departments. The LSE ones below are particularly good and have enormous relevance to the issues being discussed on this blog. One of the recent talks is about the future development of capitalism by Dani Rodrik. There are also three recent videos of Krugman talking about the return of depression economics and one of Shiller talking about Animal Spirits.

link here

Public Finances in Europe 2009

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Tuesday, June 23rd, 2009

The European Commission has released its 2009 report on Public Finances in EMU: you can get a summary (plus a link to the full document) here.

Optionality, Market Efficiency, and Asset Price Disclosure

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Tuesday, June 23rd, 2009

Sorry about the overly technical title to this little entry.  I want to ask a question rather than make an informed contribution to the discussion.  Here is the question: 

Why is the Irish government effectively withholding information about house prices from the public at large? 

As house sales prices began to fall in 2008, a relatively minor legal-technical glitch prevented estate agents and newspapers from publicly revealing the prices of completed sales.  The government could have easily fixed this legal glitch with new legislation, and also could have improved the system to allow full, complete disclosure of all house sales prices.  Rather than fix the legal glitch, the government has scrupulously maintained the new status quo, imposing an effective news blackout on house sales prices. 

My question: why and for whom? 

The absence of price information has probably slowed the house price correction, since it plays into the behavioural bias of potential sellers who psychologically tend to resist price falls (behavioural finance researchers refer to “framing” and the “disposition effect”).  The resulting disequilibrium in housing supply-demand has slowed completed sales to a crawl.  This, in turn, has done damage to a range of industries and occupations: home furnishings, real estate brokerage, the legal profession, and newspapers, among others.  These industries/occupations would have been hit by the recession in any case, but the lack of house pricing clarity made the situation worse for them.

As a basic principle of economics, price information release is almost always welfare-enhancing. There are some special conditions when this is not true, but as a general principal it seems pretty solid.  So not having house price information goes against the public interest.  It must be done for the benefit or one or more special interests, or for political purposes.

One big beneficiary is bankrupt or near-bankrupt property developers.  The lack of price clarity makes their true value more volatile and uncertain.  This allows them to play for time even if, using true but unobservable house/property prices, some or all of their businesses are currently bankrupt. 

Today’s papers note that banks are also see themselves as benefitting from house price obscurity.  Perhaps, if revelation of true property prices also would make them bankrupt, they can use the lack of price clarity to play for time.  But in the case of publicly-traded bank shares and debt securities won’t the investment community see through this obscurity and (if anything) over-correct for this obvious information blackout?  See, e.g., Douglas Diamond’s classic piece, The Optimal Release of Information by Firms.

Are there other beneficiaries or other reasons?  What is the true driver of this odd piece of (implicit) government policy, or should it be called non-policy?  The economic competence of the government could be queried, so perhaps it is simply bad decision-making on their part? I do not know the answer.

No comment

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Tuesday, June 23rd, 2009

From today’s Irish Independent

The Government is putting the finishing touches to a new bill establishing the National Asset Management Agency, but there are concerns a raft of liquidations before it is introduced could undermine the agency.

However, sources said it was seen as “highly unlikely” that other banks would take court actions because the resulting losses would land on their books, rather than the loans being transferred to NAMA.

New rankings at IDEAS/RePEc

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Tuesday, June 23rd, 2009

IDEAS/RePEc has (at last) released rankings of universities. Previous rankings spread economists over department, institutes and what not, so that the institutional ranking reflected fractionalisation as much as quality.

The new rankings are here: http://ideas.repec.org/top/top.toplevel.html

No big surprises. One non-US university (U London) in the top 10, two (Oxford U) in the top 20. Tilburg U (at 27) is top of the non-Anglon-Saxons, beating Toulouse (at 32).

UCD is top of the Irish at 98. TCD comes at 143. Ireland does better than Norway and New Zealand but worse than Denmark, countries with a comparable population.

Not bad. Could be better.