Karl Whelan’s McGill Talk

Karl Whelan also delivered a paper to the McGill summer school. I am not going to try to summarise the paper given that the author regularly posts here but I want to open a couple of aspects to discussion and I acknowledge that this may be selectively focusing on issues from a more general paper that contains some very strong insights.

In particular, I think Karl’s talk leaves wide open the extent of the problems that are emerging from credit decisions made by households and their lenders in the context of a much more open credit market during the last ten years. There seems to be some evidence for Ireland, as Karl notes, that older homeowners did not cash in their housing windfall and this, ex post, is a very lucky thing for them. However, as Karl partly acknowledges, the data currently simply does not exist for us to know the extent to which people have overstretched themselves and the potential second-round consequences this will have if a sizeable group of indebted consumers begin to default as their incomes and job prospects decline. The point made in Karl’s paper about the extent to which asset values of households also improved thus mitigating their indebtedness must be seen now in the light of drastic reductions in the value of housing and arguably many other types of household assets.

Again Karl’s paper does talk about potential problems that might arise: “So, the composition of recent changes in assets and debts likely differed substantially across demographic groups and it is the younger cohorts that are most likely to be in trouble now.” But I think we need to put something much more substantive on this statement. This is not a criticism of the paper as the data doesn’t exist so we cannot have expected Karl to incorporate non-existing information into his paper. Perhaps we can tell the story of the causes of the current decline without this information. But I can’t see how we can even begin to talk about its consequences without knowing the extent to which people have become overextended and the likely behavioural and psychological consequences of this.

Karl makes the point in the paper that we should be careful about second-guessing consumer decisions: “I think people need to be wary of moralistic commentators who warn that economic troubles are caused by greedy and feckless consumers. Most of the time, most of us are making the best decisions we can with the information available.“. But is it not long overdue to have a debate in Ireland about the way that financial products are marketed and the extent to which systemic market distortions can be introduced by poorly informed individuals being sold products that exploit limited ability to understand the risks involved and limited self-control? Are we so sure that this distortion isn’t partly at the heart of what happened during the last ten years, particularly if we observe the investment behaviour of high wealth individuals who, instead of adopting a strategy of a well balanced portfolio with a reasonable cushion against market decline, seem to have rushed headlong into a status competition based on the relative size of their property portfolios that left them all ruined and left the taxpayer with an enormous tab. Many US commentators have come to the conclusion that the lesson from the last 10 years is that the assumptions of informed consumers operating in perfect markets against competitive sellers simply don’t characterise financial markets and should not solely be what drives financial regulation. Is this the lesson also from Ireland?

Addendum

The last part of my post omits the fact that Karl’s paper makes a number of statements about financial regulation including the paragraph below. In the context of the comments that have come from the post, its worth thinking about this aspect of his paper. The behavioural economics literature is currently attracting enormous attention as it potentially offers a way of improving distortions generated by irrational consumer and investor behaviour. Yet perhaps the lesson from Ireland to take from Karl’s paper is that simple application of existing well-accepted principles of bank lending would have been sufficient to avoid the worst of what is happening. Don’t tear up your textbooks just yet?

“The failures in Irish banking regulation thus did not relate to financial innovations or regulatory arbitrage but to a failure to enforce the Basle recommendations about supervisory oversight of credit concentration risk. With the widespread belief that the housing market was heading for a soft landing, insufficient attention was paid to the extreme concentration of property development risk that could cause huge losses. And since the development loans that are causing the most problems for the banks are the substantial quantity that were lent out during the final years of the boom, an intervention even as late as 2005 to cool development lending could have prevented the upcoming meltdown. Given the likely cost to the Irish taxpayer stemming from the banking crisis, we can only hope that the simplicity of this lesson isn’t lost amid the various complicated debates in the coming years about principles-versus-rules and regulating complex instruments.”

32 thoughts on “Karl Whelan’s McGill Talk”

  1. Hi
    I dont think I will cover all the bases of your posting.
    But this is an individual case

    I am one of those consumers! who co-bought a house in 2008.
    As a public servant, we factored in everything into our calculations of affordability,.., except pension levy and tax rises.

    (Assuming ‘trouble’ means debt repayment and… tax increases, incl. property taxes)
    Faced with a property tax, I look at a situation where co workers bought equivalent property for what we paid down for a deposit, and question the fairness of a propery tax liability equalisation.
    Does it make sense to factor in year of purchase as an indicator of the loan to value of the house as a background for applying taxation?
    As an example, a hyopthetical next door neighbour who bought house in 1980 for 25,000 versus in 2008 for 350,000.
    How can it be fair to tax each example equally, considering debt
    commitments?

    Also, how informed can you be ‘as a consumer’ considering the most finite thing we consume is time…

    Al

    Ps: the lessons to be learned begin and end at the ballot box,
    Forgive the pessimsisim

  2. “Are we so sure that this distortion isn’t partly at the heart of what happened during the last ten years, particularly if we observe the investment behaviour of high wealth individuals who, instead of adopting a strategy of a well balanced portfolio with a reasonable cushion against market decline, seem to have rushed headlong into a status competition based on the relative size of their property portfolios that left them all ruined and left the taxpayer with an enormous tab.”

    Isn’t the answer to this at the heart of behavioural economics/finance? Considering your interest in this subject, perhaps you mean it as a rhetorical question.

    The herd instinct that has been widely observed in investment decisions has reduced EMH to little more than a academic plaything. This Animal Spirits/Efficient markets debate has even spawned a strange child – Adaptive Markets Hypothesis (Explained here http://www.ft.com/cms/s/0/59464cda-7539-11de-9ed5-00144feabdc0.html by Andrew Lo).

    Personally, I think that all the above theories have some validity, but none serve to fully explain how we got here, or how we prevent ourselves arriving here again at some stage in the future.

    There is an article in this weeks The Economist that engages in some self flagellation on behalf of economists every where, even including Paul Krugman’s famous quote that the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst”.

    Perhaps it is interesting that while it can be argued that bad economics got us here, we still turn to economics for the solutions to get us out of this mess. Maybe we expect too much from economics.

    Either way, the fundamental point is that economics is the study of human behaviour and as such will probably always avoid entirely accurate analysis. But also, because it is about people, the decisions made based on economic theory do effect real lives and as such have real consequences. Too much faith in any theory, whether it be Friedman’s or Marx’s cannot be a good thing.

    Economically, I am an agnostic. But perhaps we need more adaptive economists to go with our adaptive markets hypothesis.

    P.S. Should probably point out that this comment is not ‘a go’ at anyone on this great site.

  3. @ Al
    You may be young enough to emigrate and all your problems wuith bad assets and taxes may disappear…?

    My sister and her husband di this from London in the 1990s. From -ve equity they own three properties in the land of the lotus eaters. They are now in their 40s. One is part of their superannuation fund.

    Property in Australia despite being the least affordable in the world (!) has fared extremely well so far. How can it be that the outcomes have been so different? The State of Queensland where they settled, has recently sentenced the ex-minister of their government, Nuttall by name, to 7 years improsonment as he received gifts of $400,000, many in installments below reporting thresholds, from two businessmen. Another ex-minister got 6 months for blackmail of the premier, trying to get a job from him. This is in the last 4 years.

    We do not like corruption in Australia, except in Tasmania, it seems.

    Your ballot box option is not an option as you will have a choice of one political dynasty ruled party or the other! You aren’t being realistic, never mind being pessimistic. In ten years time you may still have a job but the property may be worth 40% of what you paid for it and you will have paid twice the going rental for it.

    Do not expect promotion in the public service unless you wish to cover up corruption there. I know. Try to talk candidly to senior civil servants and carefully observe their answers. Why did the C&AG, and 4 chairmen of the Revenue Commissioners not know of a written official memo to all inspectors of taxes forbidding policing of DIRT? How come, out of 700 inspectors I was the only one to produce it? I was thanked by only two of my colleagues after. Then I was sent to Coventry and I developed depression.

    You are not aware at all grasshopper!

  4. @ Lorcan

    I take it that nowhere in the great and highly respected field of economics is any modelling made of the effects of corruption in advanced economies? That timing of demands means that Lehmann went to the wall rather than Goldman? That these demands were orchestrated by ex-Goldman staff? Has a Nobel prize ever been won by an anti-corruption campaigner?

    Making piles of money is easy, except for those in the herd. A herd is kept for its meat, leather and fuel and to be ridden for fun. It is there to be exploited. They do not feel pain neither do they have a soul. Terminology is so important!

  5. Excellent to see that a debate about the system rather than mere symptoms of the system is beginning. Hopefully it will be taken up by the media.

  6. @Al

    I feel your pain.

    A fair property tax would IMO apply only to the equity owned by the householder. In a sense, someone in negative equity owns nowt but a large millstone of debt.

    Also a fair property tax would take into account any recent stamp duty paid on the property. In a sense, stamp could be considered as an upfront property tax. Say if the property tax was set at 0.5% of the fair market value, only could view 6% stamp duty as 12 years property tax paid in advance.

    We could continue on with exemptions and exclusions based on good solid principles of fairness, for example specifying a householder income threshold below which no tax would be levied. However brought to its logical conclusion, very little property tax would end up being paid, or else a lot would be paid by a very narrow base. Either way the twin objectives of broadening the tax base and producing substantial revenue would not be met.

    So I’m betting the authorities will not over-burden themselves with considerations of fairness when designing this tax. At best, there will be an income-based exemption to pander to the grey vote.

  7. Liam,

    What you are describing is market failure and it is not confined to banking and financial services. This problem is evident across all goods and services provided to final consumers – from insurance through utilities to white good and FMCGs. The hand-wringing in The Economist, to which LorcanRK refers, concludes that bolting on more detailed modelling of financial behaviour to existing models may solve the problem. This is the usual “generals fighting the last war” syndrome.

    Consumers are being isolated, disenfranchised, atomised and manipulated by large businesses to operate as little profit-generating machines for them. All businesses will clamour for “free markets” and minimal regulation; what they really want is the freedom to accumulate market power, profits and prestige. I think we are all agreed, as economists, that genuinely competitive markets supplemented by effective policy control and regulation provide the best means we know of allocating economic resources. What, I believe, in addition, we must recognise is that all market participants on the supply side of this process will continuously seek to undermine, subvert and evade the workings of competition and regulation. This is not because they are “evil”, immoral or amoral; it is perfectly rational human behaviour. Therefore there is a continuing challenge for policy-makers, legislators and regulators to be one step ahead when designing and implementing the evolving package of constraints and incentives that will support the functioning of genuinely competitive markets.

    This should not be seen as a depressing point of departure – we are practising the dismal science after all; it is both rational and realistic. There is a huge body of analysis that points to the relevance of this point of departure for policy and regulatory design, but two further factors must be brought into play.

    The first is effective democratic governance, scrutiny and accountability in the design and implementation of policy and regulation. The second is enhancing the power and knowledge of consumers qua consumers in the market.

    Most “pure” economists shy away from engagement with both of these factors, but, without engagement, any analysis performed – ireespective of how insightful or path-breaking it is – will be only of academic interest.

  8. A property tax, in the short term, would probably end up being grossly unfair to a lot of people for many of the reasons stated above. However, in the long run, i have a lot of support for it. Its non-cyclical, its non-transaction based, and therefore should be far more forecastable for the government. As we’ve seen over the last year, the huge adjustment in tax revenues collected vs the so far only minor adjustment in expenditure is the main reason we’re having so many problems with the fiscal deficit and funding there of. For similar reasons a higher annual road tax would, in my mind, be a better option than the currently penal and falling-off-a-cliff VRT.

  9. @Brian
    CGT will only work if
    1. People actually sell their residential home. CGT might put you off moving big time if you pay 22% of the gain. (House bought for €60k 20 years ago, sold for €500k now could be near €100k CGT)
    2. They sell their home at a profit.

    If they do introduce a property tax then they should make an allowance for any stamp duty paid in the past 10 years.

    As for allowing for debt on the property I’m not sure how equitable it would be to only tax people who didn’t take out a great big mortgage and didn’t get involved in the property madness. The property tax would become a tax on not spending. By moving and taking out a loan you could avoid tax! In fact, don’t move, remortgage your house and use the money for whatever you feel like or just stick it on deposit.

    They do need to come out sooner than later on what they plan to do as property tax is another cloud overhanging our already depressed property market. Seriously who would buy a house now, pay 9% stamp, discover stamp is abolished a few months later and have to pay property tax instead.

  10. I guess the question really is, what *benefit* is a property tax actually levied on?

    Is it intended to mimic the old UK Schedule A income tax, effectively levied on the imaginary rent that one pays to oneself for the privilege of living in one’s own property? Or equivalently, the benefit of not having to pay rent to some rapacious landlord.

    If that’s the case, then no exemptions at all would make sense, as the imputed rent is still as valid a concept whether you own the property outright or are seriously under water.

    On the other hand, is it the ownership of the asset itself that’s the key benefit? If so, basing the tax on the equity makes sense as this is the only thing that the householder really *owns*.

    A third possibility would be that the benefit is the capital gain, in which case Brian’s CGT suggestion makes most sense. But as Stuart points out, this would kinda bring us back to square one, in the sense of an over-reliance on transactions actually occurring.

  11. The issue of the financial crisis and the reason(s) for the upsurge in lending/borrowing across the world is very well rehearsed in 2 recent books: (1) The Subprime Solution by Robert Schiller and (2) Animal Spirits by Akerlof and Schiller. While the contributions are wide-ranging there is (in my view) worthwhile comment about “those who should know better” (the regulators) being caught up in herd mentality and how new contributions/insights from “Behavioural Economics” may allow us better understand the actions/inactions of many actors. Certainly the received wisdom and assumptions of the “rational expectations” methodology requires greater scrutiny in many areas of macroeconomics. One simple example related to the current debate in Ireland relates to the widely assumed view that “money illusion” does not exist yet all around us there seems significant evidence that consumers/contracts are embedded with “money illusion”

  12. I am 30 myself and for a time I was one of the jugglers (as David Mc Williams) calls us.

    I think McWilliams can sometimes make economic predictions in a vacuum, which is one of his weaknesses but by far his greatest talent,
    which by the way is probobly the most invaluable and distinguishing talent an economist can have, is that he seems to have a good comprehension of the ‘national heartbeat’ for want of a better term.
    His article from the independent a while ago ‘Hung Out to dry but the Jugglers must survive’ was the one that summed up the current crises for my generation.
    http://www.independent.ie/opinion/columnists/david-mcwilliams/hung-out-to-dry-but-the-jugglers-must-survive-1744459.html

    The trust of the article was incapsulated in the following sentence.

    ‘He spoke(The Gorey GP) of young fathers in their 30s, men who had never been to a doctor before, arriving into the clinic depressed, anxious and in need of counselling. They simply can’t cope’

    Housing defaults are being delayed and hidden. These same defaulters have huge personal debts that they were allowed to acumulate.
    Free marketeers and other uncivilised groups will blame these people 100% for the lot they are in.
    They have a small point but as Karl says in his paper as refernced above
    most of us were only acting with the “information we had”.
    If you are between 25 and 35 and had any type of job you were the prey of financial sales people and unfortunitely most people got cought up in the hysteria and went along for the ride. They didnt know any different and unfortunitely their parents thought it was different
    The sense of reality among my generation is tentitive at best, as a result.
    The sense of entitlement I witness from my female friends and the sense of denial of my male friends is a direct result from consistatly and without penalty living beyond their means since they started working.
    We were all still very immiture adults at this stage.

    All that credit and constant free lunches is now going but the denial is still there for the ones who have not felt the real pain yet.
    It is not until their houses and cars are reposessed that we will fall from our high horses.

    However I still feel that our elected representitives let us down so badly.
    I know its a romatic ideal that our elected representitives should care more about the well being of those that elected them, at least until they bestow the vote on companies, but that clearly did not happen.

    Why do we have laws against murder, theft, assault etc.
    Surely it is for the purpose of protecting us from ourselves?
    If there was no consiquence to stealing wouldnt many more do it?

    So essentially many laws are there to protect us from ourselves.
    Because as a society we know people’s individual instints are not always civilised.
    And so I would argue that the Government should have done so much more to protect my gereration from ourselves.
    Meanwhile they were happy to see our GDP grow, all the while completely ignoring(while at the same time profiting) our mushrooming private debt levels.
    I was lucky enough to have sold my house at the top but the vast majority of the people i know are in a lot of trouble and some even think that the government are going to help them out of the mess they are in.
    The credit is drying up but the delusions will continue until their assets are seized.
    Then the massive sociatal problems start.

  13. @Eamonn
    Sadly you are too young and got sucked in.

    Anyone who had a mortage in the early 90s when interest rates went to over 17% shouldn’t have got caught again. That was less than 20 years ago. There seems to be an assumption now that interest rates have dropped so low that they won’t head back to 4-5% again. They will and then those that are hanging in there in 2009 because their mortgages have dropped will really be in trouble.

    Experience changes our outlook and no matter how much the economy recovers your generation won’t forget this and hopefully won’t get caught again. That will be the next lot along.

    The downside for my generation is we are learning that those of us who didn’t get caught look like they are going to pay for the ones that did. Can’t win either way!

    On the government you’d like to think they should be stopping the newbies from making the same mistake but no they seem to like to encourage it.

  14. Al,
    I’m sympathetic to your situation but unsure of how to solve it in your favour without creating the biggest moral hazard in the lifetime of the state. I struggle to understand the concept of fairness in your property tax hypothesis. Why should the 1980 neighbour pay more tax than the indebted 2008 neighbour?

    Of the three main “drivers” who drove the property bubble (government, banks, consumers) we rarely hear criticism of the third group, the consumer. No-one was “forced” to take on mountains of debt to buy property and property prices only rose because each individual purchaser chose to pay a certain price for each property sold. And chose independently a level of debt they were comfortable with to complete that purchase.

    1980 to 2008 is a big gap, what about the 2005 neighbour with a 10% deposit to the 2006 neighbour with a 5% parental loan guarantee to the 2007 neighbour with a 100% mortgage. How can one justify different tax rates for all three, all in various stages of negative equity? People weren’t offering to share out “equity” in their houses as they rose but now some question should there be “fairness” in a potential tax burden as they fall.

    I don’t have an answer unfortunately but I would warn against the moral hazard such “fairness” would create and where it would end. Some commentators call for debt forgiveness from the banks. In this country, seeing as the banks are the government or the taxpayer really this would create a “fairness” conundrum. Using all taxpayers money to finance the debt forgiveness of some taxpayers indebtedness would be neither fair nor conducive to promoting more sensible investment decision making in the future that might prevent further bubbles.

  15. It’s hard not to see a huge wave of mortgage defaults next year when the mismatch between net income, mortgage repayments and house equity becomes wider and wider. A lot of the articles mistakenly assume the problem is only related to young people getting their first step on the property ladder. What about the huge rise in divorced / separated people ? according to the iona institute, using census 2006 figures, there are about 200,000 of us. A lot of them will have bought property since 2005 and will definitely be in negative equity. I paid 65K of stamp duty, not treated as first time buyer though in reality I was.

    http://www.ionainstitute.ie/pdfs/Sep07_marriage_breakdown_maps.pdf

    Also a lot of recent articles deal with various strategies for dealing with negative equity (IT, ST etc.). None of them list walking away as an option. You would think that at some point this is going to make economic (maybe not social, personal etc.) sense if things continue as they are.

    As usual in Ireland, the debate takes place with little or no facts – we don’t have facts about house prices, mortgage lending, % in negative equity etc. It seems to suit the Irish character not to deal in facts. Probably explains the mess we’re in economically.

    John

  16. @ Pat
    I didnt characterise the situation as negative equity. What I did seek to do was identify thru example, that any taxation developments need to acknowledge that ‘owner’s’ or property also have varying levels of debt, that need to be factored into the equation. Perhaps a tax credit system partly based on indebtness?

    “Your ballot box option is not an option as you will have a choice of one political dynasty ruled party or the other! You aren’t being realistic, never mind being pessimistic.”

    I think I am both unfortunately. And I think your characterisation of the situation is off. We have to much representation and not enough leadership.
    Each TD dramatically over represents the interests of their constituency to the point where the national interest is obscured.
    We indulge this by voting for the local and ignore the national.

    “In ten years time you may still have a job but the property may be worth 40% of what you paid for it and you will have paid twice the going rental for it.”
    Again, I didnt say I was in negative equity.
    And I disagree with your prediction, give or take a disaster or two!
    It sounds like you dont miss home!!
    Good luck in your healing
    Al

  17. @CM

    I agree completely with you about moral hazard.
    And I have no problem recognising ownership of debt for the next…. XX years, but if I can get my novel about Barry O Potter, a young Irish magician published,,,,,

    But I would find it a little rich if the Govt introduces a property tax system that created an unfair burden on those already overburdened; and say that the whole historical situation had nothing to do with them.
    They along with the other two groups share a responcability for this mess.

    I would not identify my own situation as being overburdened yet, and dont want to create the impression. There are a whole lot of people caught up in this and they do deserve a hearing.
    Just had to turn off Liveline a few minutes ago, its too much misdirected anger.

    I also think that trying to create a completely fair tax system in unachievable and it would be better practise to iron out the more unfair aspects and leave it at that.

    Judging the Irish Govt on past performance, I know what I am expecting from them…

    Good Day
    Al

  18. @CM

    “Of the three main “drivers” who drove the property bubble (government, banks, consumers) we rarely hear criticism of the third group, the consumer”

    Actually among free marketeers and friedmanites consumers are the ones that are most blamed. For seasons mentioned in my post above I would contend they are the least culpable of the three groups. There are lots of these types on the Irish economics forums I look at but not as many that are as blatent among the media.

    “I’m sympathetic to your situation but unsure of how to solve it in your favour without creating the biggest moral hazard in the lifetime of the state.”

    How woud you charictorise NAMA, if not the biggest Moral Hazzard in the history of the state?

    BTW are you the “An Bord Snip Nua” CM?

  19. “Also a lot of recent articles deal with various strategies for dealing with negative equity (IT, ST etc.). None of them list walking away as an option. You would think that at some point this is going to make economic (maybe not social, personal etc.) sense if things continue as they are.”

    A lot of people seem to be under the impression that “Jingle mail” is an option in this country. This is NOT an option here,the only option is emigrate and do not return.

    This is a very interesting article
    http://www.scientificamerican.com/article.cfm?id=the-science-of-economic-bubbles

  20. The current debate in the US about whether to set up a separate body to look at financial products is instructive. Proposing a new body in Ireland would be a somewhat unusual reaction to the McCarthy Report but there should be further clarity as to who performs the functions in Ireland that are laid out in the Obama/Geithner plan. There looks like a mighty tussle taking place in the US about whether this idea should take off, with most of the financial services industry being vociferously against it.

    http://www.nytimes.com/2009/07/01/business/economy/01regulate.html

    “It’s obvious from the history of the last 20 years that the regulators never understood that protecting consumers is also a way of ensuring the safety and soundness of financial institutions,” said John Taylor, president of the National Community Reinvestment Coalition.

  21. @Liam,

    Thank you for pulling this thread back on track. Various posts highlight the pressing requirement for a radical, new body to inform and empower consumers of financial services and to act as an advocate on their behalf. The proposed US consumer protection agency in the area of financial services that you highlight is highly relevant in the current situation in Ireland. (The vociferous opposition of the banking community should casue no surprise. It’s been one-way traffic for far too long. As Paul Krugman has frequently advocated in the NYT, banking (particularly the utility nature of credit extension to households and small businesses) should become boring again. And Pres. Obama is in a hurry since the mid-term elections next year are likely to reduce his majority in the House and remove his anti-fillibustering majority in the Senate.)

    Maureen Gaffney, no mean performer in the realm of quangocracy, in Wed’s IT, presented the case for a balanced assessment of the restructuring of the quangocracy in the light of Mr. McCathy’s BSN report:http://www.irishtimes.com/newspaper/opinion/2009/0723/1224251143680.html

    What, unfortunately, she didn’t highlight is the extent to which many of these agencies do things to and for individual citizens and groups of citizens falling into specific categories without fully engaging with, informing or empowering these citizens.

    The Government’s decision to merge the National Consumer Agency with the Competition Authority – and any rationalisation of regulatory/consumer advocacy agencies that will be implemented on foot of the BSN report – will actually diminish the advocacy of consumers’ interests. What is required is a single consumer protection and advocacy agency that has formal powers to investigate, to compel the presentation of evidencea and to represent consumers in judicial, quasi-judicial, regulatory and competition processes. Initially it might focus on banking and financial services, but there is no reason why its brief could not be expanded to address the provision of all goods and services. And it could tap into the extensive voluntary advisory networks at the local level. Significant economies of scope and scale could be captured.

    There would be signifciant benefits, both politcial and economic, for most consumers and citizens if a bit of the “fear of god” was put into the rip-off merchants and the costs of doing business in Ireland were reduced. I am happy to leave the structural and institutional aspects of such an sgency to the experts in this area – for, example Colin Scott has posted frequently on these features. My focus is on purpose and function which have immediate economic implications.

    Any takers?

  22. The recent Irish report on Financial Capability is also below. Unless there is an attempt to embed a proper testing framework into them, then individual school and young adult initiatives will be a waste of time and wont contribute very much to the aim of improving the financial services market. Also (this is partly for another thread) but there is a lot more to biases in financial decision making than information and education in itself. The “Nudge” literature referred to in one of the comments above focuses on short-term biases in thinking and decision making, and policies that operate on this are the most debated at the moment in the US, firstly because they are more likely to work that simply providing information and relatedly because they might remove some existing thriving markets in exploiting stupidity and limited self-control. The industry is largely supportive of financial capability measures but mostly vociferously against behavioural-type interventions. I don’t have a fixed view yet as we can’t just lift something from the US regulatory environment and dump it into Ireland but I am sure that this debate should be had here properly.

    http://www.financialcapability.ie/files/sg.report.01jul09.ek.pdf

  23. @Eamonn Moran

    Yes, you can go to prison for minor shoplifting but negligently leave a small number of developers determine the destiny of a nation and you get a guaranteed high income for life.

    There is a high degree of financial illiteracy in every country but in Ireland, you can go through two decades in the educational system and not have a clue how the PAYE system works, (unless some bright spark has twigged to this in the Dept of Educ in recent times) never mind more exotic financial innovations.

    So when the Taoiseach eggs people on to invest in property, how can consumers be blamed?

    Then there was the impotent finger wagging from the central bank and across the public service – – firing up an over-heated economy, benchmarking, Tammany Hall style decentralisation etc – – no senior civil servant had the courage to take a principled stand.

    On consumer protection, the Bank for International Settlements recently said that financial products should go through a process of screening similar to medicines.

    The National Consumer Agency in its new structure with the Competition Authority, may be given the consumer information function of the Financial Regulator.

    That would be a case of going from the frying pan into the fire.

    Despite more than a half billion euros spent on e-Government, Ireland does a very poor job in using the web to provide consumer information.
    A comprehensive, searchable database online system would be a big potential step – – emphasis on potential.

    The FC updates surveys annually and makes pdf copies available online.

    The NCA, which was established in response to “rip-off Ireland,” has become a symbol of it with its 14-strong board, high salaries and big PR budget. It only recently decided to put the selection of grocery prices of the main supermarkets online.

    @John

    “As usual in Ireland, the debate takes place with little or no facts – we don’t have facts about house prices, mortgage lending, % in negative equity etc. It seems to suit the Irish character not to deal in facts. Probably explains the mess we’re in economically.”

    For example the CSO does not publish data on development land sales even though it could easily do so:

    E.g comment on its publication of agricultural land sales data: “Transactions outside the range €500 per hectare (€202 per acre) to €35,000 per hectare (€14,164 per acre) have been excluded on the basis that the purchaser may intend to use the land for non-agricultural purposes or that a non-market (family, relatives, etc.) element may be involved in the transaction.”

    The data is obtained from the Particulars Delivered (PD) form which is processed by the Valuation Office. This form is usually completed by the solicitors representing the transferor and the transferee when land is sold.

  24. @Liam,

    I fully agree with you “that this debate should be had here properly” and also agree with your perception that it would be inappropriate to parachute a legislative package into Ireland from the completely different policy, regulatory and administrative environment in the US. This is not so much a debate, but a campaign that should be advanced on behalf of citizens and consumers in all of the developed economies. It is, perhaps, instructive that banking and financial regulation in Canada allowed it to avoid the brunt of this global financial crisis and that the deep-seated democratisation of the US and the associated ingrained thrust for collective action by citizens makes a legisaltive package of this nature not only possible but achievable. (In passing, the Canadian experience should not, perhaps, surprise, since the national motto is “Peace, Order and Good Governance”. And it is an interesting historical question as to the impact on US democratisation and collective action by citizens of the arrival of multitudes of Irish immigrants schooled in Daniel O’Connell’s mass movements for Catholic Emancipation and the Repeal of the Act of Union.)

    The FC Report to which you provided a link demonstates the scale of the chellenge in Ireland. It is only necessary to examine the list of the parties involved – Department of Education and Science, Department of Finance, FÁS, Financial Regulator. Financial Regulator Consultative Consumer Panel,
    Irish League of Credit Unions (ILCU), Institute of Bankers in Ireland (IBI)
    Irish Banking Federation (IBF), Irish Insurance Federation (IIF),
    Irish Vocational Education Association (IVEA), Money Advice and Budgeting Service (MABS), National Adult Literacy Agency (NALA), National Council for Curriculum and Assessment (NCCA) and The Pensions Board.

    It is comprised of suppliers and of policy-making and implementing agencies and regulators that have been largely captured by the suppliers. Consumers and citizens do not get a look in. Even the NCA, as ineffectual as it is, doesn’t merit representation. Yes, the Financial Regulator’s “Consultative Consumer Panel” is involved, but “public consultation” in the Irish regulatory context is a totally ineffectual and hyprocritical process that simply rubber-stamps decisions already made.

    The potential for mass collective action probably no longer exists – even if the internet provides some opportunities. The pursuit of individual freedom with minimal recognition of collective responsibility has served the suppliers of goods and services very well. Governments are charged to forcefully curtail any extremes of personal freedom that might damage business interests or engender any form of collective action by citizens.

    It is a depressing prospect. This FC approach, which has EU backing, by seeking to provide citizens with more information but without empowering them will impose more responsibility on them and, perversely, make them even more vulnerable to the sellers of snake-oil. I recognise the potency of the “nudge” approach, but I am instinctively suspicious as the suppliers of services will only accept its use if they are confident that they can find ways to manipulate it in their interests. I see nothing that will stem the avalanche of households in unsustainable negative equity and of bankrupt small businesses. We have two major problems/challenges here: dealing with the financial fallout for individuals, households and businesses and empowering citizens to prevent it happening again.

    @Michael Hennigan,

    You have previously been criticised on this blog for using a scatter-gun, nay, populist approach, by some of the academic purists, but I find the nuggets of solid data and information you uncover highlight the scope and scale of the economic (and political) challenge.

    For some time on this blog I have being trying to advance (in parallel to the torrent of comment on the “big-ticket” issues, e.g., the fiscal adjustment and NAMA, whose resolution is unlikely to be impacted in any significant respect by what is discussed on this blog) some proposals to address more deep-seated problems.

    In addition to the empowerment of citizens and consumers (discussed in this thread) and the need for major reform of democratic governance, I have tried to make the case for a countercyclical investment stimulus to lean against the deflationary impact of the required fiscal adjustment and to partly compensate for the huge deleveraging by households and businesses. The financing of this investment stimulus (focused on upgrading utility (transport, energy, telecomms, water and waste water) infrastructure) could be leveraged by the proceeds from the sale of some of the existing semi-states. In addition, the restructuring and sale of the energy semi-states would lead to lower electricity and gas prices.

    The penny seems to be beginning to drop that the excessively high costs of doing business in Ireland combined with the contractionary fiscal adjustment and the overly generous bail-out of the banks and developers will lead to an economic death spiral. Brendan Keenan in today’s Sindo is beginning to join the dots: http://www.independent.ie/business/european/competitiveness-is-about-a-lot-more-than-wages-or-costs-1841382.html

    How many more Element Sixs do we need?

  25. Paul – you should set up a blog to put forward discussion on the wider points you have been raising so often on this blog about regulatory capture and reform particularly on the energy regulation side. Very few people here would claim that the topics you address are not interesting but its hard to deal with such a wide-ranging set of points that involve so many different assumptions, all of which would take a long time to debate, in the context of specific posts that are often addressed at something much narrower. For example to even begin to respond to your comment I would have to make clear some views on whether I agree with your perception of industry, collective consumer action and a whole range of public bodies and I dont even know where we got into utilities infrastructure from what preceded your comment. Also, if your goal is to develop a coherent advocacy position that has a societal influence then you would achieve this a lot better in a forum where you had full swing.

  26. http://www.tribune.ie/article/2009/jul/26/soldinto-life-long-debt

    This is a very worthwhile article but it is also designedly alarming. There is no advice on bankruptcy, a process designed to prevent lifelong debt, and there is no discussion of inappropriate lending by lenders, many of whom should have known that lending over 80% was reckless and should have the debt reduced accordingly, by court process. A test case is in order! There is the statue of limitations. The debt should be denied and see what sort of action the lender takes. With luck, they will not be able to prove the mortgage, but in Ireland that is unlikely, then the bond payable upon default to the lender may mean that the lender has no cause of action. This will be the right of the insurance company…. All very fraught but the idea of 30 years of debt is appalling!
    Emigration is the last possibility. Combined with the staute of limitations and a career break, wonderful; things may happen.

  27. Liam,

    Thank you for concealing your annoyance so diplomatically. I may be slow on the uptake, but, having been shown a yellow card previously, I’ll make my exit.

  28. @ Pat’s linked article

    What exactly is the process for personal bankruptcy in this country, does anyone know? Like how long can a bank or whatever hold a claim over you? Forever? I thought it was something like 12 years, or am i mistaken? I would hazard a guess that personal bankruptcy laws, having been essentially unnecessary here for the last couple of decades, are set for a serious overhaul.

  29. Firstly, the finger should point to lack of regulation of the banks, then to developers who fed off their poor lending practices, it should not point to the tax payer or those who unwittingly were caught up in the bubble.

    In a scenario where both A and B require a loan for a house/land/property

    If the banks provide a loan to A and B, both will compete using their loans as collateral to secure their life time asset, their home!

    Without lending, the house/land/property have a different value unstoked by poor lending practices…

    http://www.colmbrazel.wordpress.com or http://www.namasayno.com where I attempt to probe some ethical aspects of how the tax payer gets fleeced by NAMA and unregulated lending practices!

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