Archive for June, 2009

More Bad Signs on NAMA

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Monday, June 22nd, 2009

Speaking on RTE’s The Week in Politics (about 16.20 minutes in) Minister for Health, Mary Harney noted repeatedly that NAMA would take on good loans as well as bad loans and then said the following:

This is an important issue. From the good loans they will get cash to run on a break even basis on a day-to-day basis. The ESRI has done a simulation study and they have suggested that over ten to fifteen years this will break even as far as the taxpayer is concerned and that’s the reason as well to take the good loans to raise the cash.

Two aspects of this statement are worrying—the discussion of good loans and the comments about breaking even. (more…)

Spillovers

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Monday, June 22nd, 2009

Can a monetary union survive without centralised financial supervision? Can it survive without a strong central fiscal authority? These are key questions for EMU going forward. Two articles in the FT advance the debate by pointing to two very different types of spillover that would seem to imply a need for collective action.

The marginal propensity to import and multiplier pessimism

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Sunday, June 21st, 2009

In his comment on Kevin’s vertical disintegration post, John Fitzgearld drew attention to the strong linkage between Irish exports and imports.   This got me thinking about Ireland’s marginal propensity to import and its association with, for the want of a better term, multiplier pessimism.  On the face of it, there are certainly grounds for pessimism: in recent years imports have been averaging about 80% of GNP!   But this tells us little about how much of an increase in domestic demand would leak out in increased imports.  (more…)

World Leaders in Moral Hazard?

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Friday, June 19th, 2009

Today’s Irish Times reports the Minister for Finance as delivering comments along the following lines yesterday:

There was an ideological view that certain banks should be let fail and that bondholders and investors in that bank should take the hit. However, if Governments were to allow this happen, the result would be a ‘‘staggering loss of confidence in whole economic system of a country’’ and therefore ‘‘governments have to prevent banks failing and stabilise them’’, he said.

The implication of these comments is that no bondholder of an Irish bank should ever take a hit, no matter how badly the bank fails, as long as the Irish taxpayer is capable of bailing them out. In other words, Irish bank bonds should now be interpreted as having the same risk as Irish sovereign debt. The Minister also ruled out any further nationalisation, which in the absence of any kind of debt-for-equity swap (which I discussed here but would be ruled out by the Minister’s bond-holder comments) means that he is imposing a de facto lower limit on the value of shares in our major banks.

I reckon these comments place Minister Lenihan on the international cutting edge of moral hazard. Yes, the international reaction to the current crisis, with implicit safety nets made explicit and lots of new safety nets introduced, has made this a difficult contest to win. Maybe I’m being parochial here in singling out the Minister for this award, so perhaps our readers can highlight for me another government that deserves the award.

Incidentally, I would also argue that ideology is largely in the eye of the beholder. From my position, Minister Lenihan’s no-bondholder-left-behind approach appears far more ideological than the positions of those who argue that losses should be shared between the state and the various providers of risk capital.

Collapsing trade in a Barbie world

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Thursday, June 18th, 2009

In recent months, several analysts have argued that the unprecedented trade collapse the world is currently experiencing is linked to the vertical disintegration of production. Every time the US buys one fewer Barbie doll, trade declines not only by the value of the finished doll, but by the value of all the intermediate trade flows that went into creating it.

Not being a theorist, I have been puzzled by the argument for a while, but I now think I may understand.

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Baby Boomers

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Thursday, June 18th, 2009

The number of births recorded in Ireland reached a twentieth century peak of 74.0 thousand in 1980 and fell to an all-time low of 48.2 thousand in 1994.

Births began to increase in the second half of the 1990s and the rate of increase has been rapid over the past five years. The latest figures released by the CSO (Vital Statistics Third Quarter 2008) raise the possibility that the 1980 peak may soon be surpassed, although of course this would still imply a significantly lower birth rate as the population is now some 30 per cent above its 1980 level. The TPFR (total period fertility rate – roughly the number of births per woman over her child-bearing life span) declined from 3.23 in 1980 to a low of 1.85 in 1994 but was back up to 2.03 in 2007.

These huge swings in the birth rate have serious implications for resource allocation, especially in the health and education sectors. The Dublin maternity hospitals are now bursting at the seams, while the educational system will continue to feel the impact of growing numbers of school-age children for years to come.

Will the number of births continue to grow? Population projections are notoriously uncertain, at best serving to illustrate the implications of alternative assumptions about key demographic variables.  The projections for 2011-2041 published by the CSO in April 2008 assumed that the TPFR would decline to 1.78 by 2011, which seems a high given the continuing buoyancy in the birth rate.

But there are reasons for believing that the birth rate could suddenly take a nosedive, as happened in the 1980s. The peak in the number of births recorded in 1980 was quite dramatic and the subsequent rate of decline steep. (The decline began shortly after Pope John Paul II’s visit to Ireland in September 1979, when he preached against contraception and abortion.)  More significant is that it coincided closely with the sharp rise in unemployment as Ireland entered the deep recession of the 1980s. The following graph shows the correlation between the number of births (four quarter moving average) and the seasonally adjusted numbers on the Live Register, lagged three quarters.  The coincidence between the peak in the number of births and the floor in the unemployment rate is striking.

The second graph is the comparable picture for the years 2005 to date (using the standardised unemployment rate in place of Live Register figures).

The unemployment rate began to increase dramatically in the second half of 2008, so it should begin to affect births registered from the second quarter of 2009 onwards.  The latest available data are for 2008Q3, but it is interesting to note that the graph shows the number of births plateauing over the period 2007Q4-2008Q3.  If the experience of the early 1980s is anything to go by, this graph will nosedive over the coming years. Watch this space!

The Central Bank of Ireland Commission

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Thursday, June 18th, 2009

Minister Lenihan has announced  the new financial regulatory framework for Ireland: details here.

Irish Society of New Economists Conference

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Thursday, June 18th, 2009

This years ISNE Conference takes place in Limerick on Friday 2nd October. The websites of the 2007 and 2008 versions of this are available below also to give prospective applicants a feel for the programme. The event has run since 2001 and the idea is to encourage postgraduates as well as early stage researchers in the public and private sector to present findings. The programmes in the past two years have been really excellent, involving a mix of speakers from across all the main economics institutions in Ireland and also a substantial international component. Stephen Kinsella, Martin Ryan and Dominic Trepel are the organising committee this year. Deadline for submission of abstracts is July 15th. There is no registration fee.

http://sites.google.com/site/isne2009/

http://isne08.googlepages.com/

http://isne2007.googlepages.com/

Stimulus?

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Thursday, June 18th, 2009

Stimulus is a term being used these days by a wide range of people across the political divide. Unions, business groups, Fine Gael, Labour—everyone has a stimulus plan.  Everyone, of course, apart from the poor old government.  And, indeed, the vast majority of mainstream economists in the country.  Since the term keeps popping up everywhere, I thought it might be useful to open a debate about it here, outlining why I have not joined the public clamour calling for stimulus.

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The Fed and Financial Conditions in the US

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Thursday, June 18th, 2009

This speech given by Fed Governor Elizabeth Duke and its accompanying charts are the most useful summary I have seen yet of the various interventions taken by the Federal Reserve and their effects on financial markets.

The case for collective action

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Thursday, June 18th, 2009

This is exactly why people were arguing for coordinated stimulus programmes earlier this year.

Financial Measures (Miscellaneous Provisions) Bill 2009

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Wednesday, June 17th, 2009

Thanks to Joan Burton for drawing attention to this bill, which was published on Friday.  It hasn’t received any media attention as far as I can tell.  However, despite its dreary name, it has some important stuff in it.  Among other things, it proposes an extension of the bank liability guarantee.

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The Euro and Banking Stability: Lessons from Ireland

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Wednesday, June 17th, 2009

Patrick Honohan has a new paper on this topic, to be presented at the Dubrovnik conference next week: you can download it here.

State would have to repay billions to depositors in risky Anglo wind-down, by Alan Dukes.

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Wednesday, June 17th, 2009

See full piece here.

Baltic trilemmas

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Wednesday, June 17th, 2009

The FT has a nice piece on Latvia this morning. To my mind the most interesting sentence in it was the following:

IMF officials have indicated that the organisation was divided over the wisdom of defending the lat’s peg but was finally persuaded by pressure from Riga’s EU partners as well as the Latvian government’s own refusal to contemplate devaluation.

If there is one thing we have learned about international currency markets in the past couple of decades, it is that fixed exchange rates and internationally mobile capital don’t sit well together. A European response to this general lesson has been to go for full monetary integration — EMU — rather than stick with unstable intermediate arrangements such as the EMS.

There are logical consequences for how we deal with Latvia. If the country’s EU partners don’t want it to devalue, they should offer it immediate EMU membership. If they don’t do this, then we can probably leave aside the normative point that Latvia ought in its own interests devalue, since as a positive matter it will almost certainly be forced to be. As this article points out, a forced devaluation would have repercussions far beyond Latvia. It would be nice to avert a crisis before the fact rather than after it, for once.

Suggestions for Ireland’s response to Obama’s tax plan

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Wednesday, June 17th, 2009

Trina Vargo of the US-Irish alliance offers some advice on how Ireland should respond to Obama’s proposed clampdown on tax havens here. Although this is more of a political approach to the issue than mine of a few weeks ago, she too cautions against over-reacting.

The Great Recession versus the Great Depression

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Tuesday, June 16th, 2009

Martin Wolf discusses the work of Eichengreen and O’Rourke here.

Consumption Smoothing

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Tuesday, June 16th, 2009

A topic that perhaps deserves more discussion is whether/how households are actually smoothing consumption throughout this recession, particularly where one or more household member has been laid off or had substantial reductions in salary and hours. There are many dozens of papers that one could cite in developing some ideas in this area. Two papers below have particularly interested me as I have been thinking about this. The first looks at the extent to which increased debt payments interfere with consumption smoothing. The second looks at the extent to which consumers can maintain welfare by cutting back on durable expenditure while maintaining non-durable consumption. In an optimistic version of the Irish economy, people who have been made unemployed may be able to smooth through the current period by (i) using savings (ii) using redundancy payments (iii) delaying durable expenditure (iv) using extra time available to seek lower prices (v) taking advantage of generally lower prices economy wide (vi) working with financial institutions to restructure their debt payments (vii) switching more to domestic production e.g. making sandwiches rather than buying lunch in a cafe (viii) using informal bartering as a method of acquiring services (ix) borrowing from relatives (x) social welfare (xi) income insurance (xii) charity. I am sure readers can think of many other ways in which people who have been laid off are trying to smooth consumption. We have never had high unemployment in Ireland coinciding with very high levels of personal debt and, as such, relying on previous Irish research is not likely to be very informative as to the welfare issues at stake here. The previous discussion on price indices is clearly relevant but a wider discussion of the role of formal and informal institutions in consumption smoothing in this new environment would be interesting.

Do High Debts Hinder Consumption Smoothing?

Shocks, Stocks and Socks

New Sectoral Financial Data for Ireland

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Tuesday, June 16th, 2009

The CSO has just released the 2008 data on sectoral balance sheets and financial flows:  a wealth of fascinating detail.   The PDF is here and the data are here.

Growing the Economy

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Tuesday, June 16th, 2009

The trade union UNITE has released its recommendations for economic recovery here.

The Returns to Financial Engineering

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Monday, June 15th, 2009

Willem Buiter writes here about a highly-profitable strategy undertaken by Amherst Holdings.

Morse: the Trinity link

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Monday, June 15th, 2009

Those of you familiar with Sergeant Lewis’ character in the Inspector Morse series may find it appropriate that actor Kevin Whately in fact comes from impeccably academic stock.

Anglo-Irish Bank: “Spending cash we do not have to save a bank we do not need”

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Monday, June 15th, 2009

Brian Lucey explains in this Irish Times article: you can read it here.

An Emerging Consensus on NAMA Overpayment?

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Sunday, June 14th, 2009

One of the interesting aspects of the evolving public discussion about NAMA is that economists from the stockbroking community have become increasingly explicit about the fact that NAMA will overpay for its assets.  The latest example was the column in today’s Sunday Tribune by Oliver Gilvarry of Dolmen Stockbrokers.  He suggests that NAMA’s approach to pricing will be as follows:

The haircuts will be determined by what the banks can take without requiring large injections of capital.

Similar predictions have been made in other recent reports by Davys, JP Morgan and others.

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Raise the Last Glass

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Saturday, June 13th, 2009

The PBS series Wide Angle recently made an interesting film on the failure of Waterford Crystal:

IT Article on Job Subsidies

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Friday, June 12th, 2009

Following on from my post last week on job subsidies, here‘s an article I wrote on the subject for today’s Irish Times.

How Many Regulatory Agencies Are There and What Does it Mean?

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Friday, June 12th, 2009

My post last week on Smart Regulation drew out a number of responses which argued, in essence, that there are too many regulatory agencies in Ireland. For some the proliferation of regulatory agencies is taken as an indicator that there is too much regulation. I do not think it is possible to draw inferences about the quantity or intensity of regulation from the numbers of agencies.

What is perhaps more interesting than the bare numbers of regulatory agencies is their growth. It is noted in the Government report Bodies in Ireland with Regulatory Powers (2007) that since the White Paper on Regulating Better declared a virtual moratorium on the creation of new regulatory agencies in 2004 (‘The Government will create new sectoral regulators only if the case for a new regulator can be clearly demonstrated in light of existing structures’) ten new agencies had been created and a further nine were planned. The admitted failure of government to follow its own self-denying ordinance raises the questions what has happened to regulatory agency numbers, how can the pattern be explained, and what does it mean?

Bodies in Ireland with Regulatory Powers concluded that of the 213 bodies with statutory regulatory powers eight of these were non-state bodies, 114 were local authorities, nine were regional fisheries boards, and 15 were government departments. This leaves 67 central state agencies with regulatory powers, but not all of these are primarily regulators, and some are not regulators of business. The Labour Court, for example, is chiefly an adjudicatory body and the Higher Education Authority is chiefly a transfer agency (although the handing out of cash clearly is used for regulatory purposes), and the Revenue Commissioner are mainly concerned with collecting taxes.

New UCD Geary Institute Research suggests that numbers of agencies for which the primary function is regulatory held fairly steady at just under twenty between 1950 and 1990  but that the number increased by 50 per cent in the 1990s and had more than doubled from the higher base to 68 by 2008 (Source: Mapping the Irish State project database  (funded by IRCHSS)).

How can this growth be explained and what does it mean? Some of the agencies established since 1990 were created to meet European Community obligations to regulated independently both of dominant incumbent firms and of government departments with stakes in the industries concerned – notably communications and energy. In other instances there was a concern to establish the credibility of a regulatory function previously exercised in a government department – the Food Safety Authority of Ireland provides a key example. In some instances there has been a sense that government departments will struggle to develop and sustain the expertise and focus necessary for a regulatory task. In other instances the establishment of new agencies can more readily be explained by a combination of fashion (regulatory agencies have become a stock solution to all manner of public policy problems) and political need to demonstrate symbolically a commitment to sorting out some high-profile problem. The Health Information and Quality Authority springs to mind as an example of this. Politics may also play a role government sees the potential to shift the blame when things go wrong with regulatory regimes – examples are legion so I shall not name names.

Does the growth in regulatory agencies demonstrate that there is too much regulation? Actually it tells us little about the quantity and intensity of regulation. It is perfectly possible to have masses of regulation with few or no regulatory agencies (Japan is a case in point). One might argue that all these agencies are very costly, but typically they have relatively small budgets and their financial significance in most cases is likely to lie more in the negative or positive effects they have on economic and social activity more generally (their impact rather than their direct costs).

The growth of regulatory agencies tells us more about the changing style of government in Ireland. There has been a trend away from direct provision of services in the network sectors towards regulated oversight of private provision ( and this common to many European countries) and, distinctly, a shift towards external oversight with a greater degree of transparency at arms-length both from government and from industry. Ireland provides a core example of a regulatory state. Indeed, the limited direct state provision of welfare services historically supports an argument that in some ways Ireland was a regulatory state avant la lettre.

As I hinted in my previous post the challenge of enhancing the efficiency and effectiveness of regulatory governance is unlikely to be met through an exclusive focus on cutting or merging regulatory bodies (as Brian Lenihan proposed in the October budget), but rather through developing a better understanding of where the capacity to develop and deliver on regulatory objectives lies, and finding ways to harness that capacity (whether it lies with state agencies, firms or civil society organisations or more typically a mixture) through the varied processes of meta-regulation.

New Issue of Economic and Social Review

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Thursday, June 11th, 2009

The Summer 2009 issue is now online here.  This is the first edition with a dedicated policy section [ see http://www.esr.ie/PolicyAnnoucement.html].  Table of contents below:

The Misperception of Inflation by
Irish Consumers
David Duffy and Peter D. Lunn
ESR Vol 40#2 page 139

Estimating the Price Overcharge from
Cartelisation of the Irish Automobile Industry
Franco Mariuzzo, Patrick Paul Walsh and Oliver van Parys

ESR Vol 40#2 page 165

Social Partnership: From Lemass to Cowen
William K. Roche

ESR Vol 40#2 page 183

Policy Section

Resolving Ireland’s Banking Crisis
Patrick Honohan

ESR Vol 40#2 page 207

A New Fiscal Strategy for Ireland
Philip R. Lane

ESR Vol 40#2 page 233

F&D and the Euro

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Thursday, June 11th, 2009

Finance & Development also give a lot of attention to Europe and the euro in its most recent edition: see here.

The Economist on the euro area

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Thursday, June 11th, 2009

This week’s Economist magazine has a special report on the adjustment challenges for members of the euro area: you can read it here.