Non-Dutch Disease

Midas disease?

The rotten fruit of Usury ?

Al

Some quotes from (“Irelands IFSC – A Story of Global Financial Success” by Fiona Reddan, Published 15 September 2008)

1.“The IFSC is the source of the greatest amount of revenue in the history of the State without any loss or investment by the tax payer”, Dermot Desmond

2. “The enormous funds flow from the IFSC has energised the Irish financial system by creating credit, huge amounts of credit that otherwise mightn’t have been available.” Brendan Logue, Former Head of Financial Services, IDA

3. In May 1990 the Minister for Finance told an audience at an IDA event in London that regulation of the IFSC was being achieved with “commendable flexibility and without detailed rule books”.

4. In the same month the Managing Director of Corporate and Investment Banking at Bank of Ireland told Euromoney ,”The authorities have never shown more flexibility and less bureaucracy.”

Is there any connection between the rapid growth in size of the financial services sector in Ireland in the last 10-15 years, its creation of “huge amounts of credit that otherwise mightn’t have been available.” , the “commendable flexibility” of the regulators, the credit driven housing boom, the inevitable bust and the current banking crisis?

Is the survival of the financial services industry a part of the government’s determination to construct NAMA the way it has?

Since its not really a disease: Netherlands neurosis?

Its interesting to note the number of chairs in finance and banking permantly endowed by the irish banks over the fat years, to ensure that the univeristies could do what KoR suggests…..ZERO.

If you had found a role for money and banking in your DSGE models, we might have been more interested.

Professor Lucey,
Who would have sat in these chairs? How would they have been chosen? Whose interest would they have served? Would they have taught their students to be critical of those who ultimately paid their bills? The economist closest to the financial industries appear to have been the most clueless about their short comings. Though Rubin, Greenspan and Summers are all now multi-millionaires, strange that.

@Stephen Kinsella,

Nice try Professor but I’m not sure that even Professor Godley would claim to be part of modern mainstream macro. He might even be insulted. I’ve just had a flick through his much earlier text, written with Francis Cripps (now that dates me) and I’m guessing that not much has changed in the intervening decades. The debates being conducted between Krugman, de Long, Lucas, Prescott etc are what I was referring to, I think. It’s the 21st century disconnect between orthodix economics and the way the world works. The triumph of technique over relevance. Friedman tried to finesse is with the ‘as if’ assumption in the 1950s but it never really washed did it? Arrow and Debreu couldn’t find a role for money; Wynne Godley can, but I’m not sure that anything that eminently sensible chap has written would fit into a dynamic, stochastic general equilibrium model. What do we fill the heads of economics students these days, DSGE or Godley?
Much is being written of the need to rebuild macro. As an ex-practitoner, now a banker (of sorts), I can attest to the need for economics to reconnect with the real world. Surely it is uncontroversial to assert that if you want us to endow chairs we should demand a little relevance?

I am quite surprised by the terms of this thread. Even before you get to Economics 101, try looking at Wikipedia.

I find it quite a leap to apply this notion
http://en.wikipedia.org/wiki/Dutch_disease
to describe some form of inefficiency in the financial sector

It seems to me that a term exists already, that gets closer to Kevin O’Rourke’s worries i.e.
http://en.wikipedia.org/wiki/Financialization
with quite some literature around it.

One of the articles cited is a diatribe published in the FT by Benjamin Friedman (whom I’d guess Kevin O’Rourke knows from his Harvard days).

Now if there is one thing I hate, it is sweeping generalisations, and particularly so from an elderly professor that also ought to know a thing or two about finance (and historians that should have a sound grounding in economics as well as finance).

Friedman thinks, that for those in finance, “These talented and energetic young citizens could surely be doing something more useful.” And “at the level of the aggregate economy, we are wasting one of our most precious resources”. My blood boils.

Ireland Inc has some very important economic and financial decisions to take, urgently. The costs and benefits of whichever road is travelled are massive. And so it is for most sovereigns and companies today when it comes to taking financial decisions. So it is generally worth paying up for sound, professional advice. I think that can be understood without taking Economics 101.

Slagging financiers, bankers and economists may give a bewildered public some comfort. (It is harder to make a scapegoat out of the historians!). Yet there will be no recovery – in Ireland or elsewhere – until economic and political conditions allow finance to function properly again.

@ Kevin/Donal,

Do either of you know of research on the velocity of money and how it has changed over the past decade? On a mundane level, travelling to a different currency area these days really highlights the change in how money works in an economy (e.g. Maestro cards, Oyster cards, etc.), and how the need for physical cash has diminished.

Perhaps all these changes are covered within “M3”, but my guess would be that major internal restructuring within M3 has as much consequence in day-to-day life and the impact of monetary policy as a blurring of the boundaries between M3 and M4/M2/M-whatever number one chooses…

Ponzi scheme because
The end is always the same. Massive losses with destruction of capital. In honest frb, the participants do not care if what they are doing will cause loss, they are paid to do it. In dishonest frb, shadow style, pure ponzi there means that those running it know that there will be a payoff and a massive loss. And they care!

pyramid finance
It enables the creation of OPM for a series of transactions that benefit those who get in early and get out before the end.

Dutch disease
is quite good

@Ciarán
Maybe M.Sarkozy is also getting to you, besides the superannuated prof!

It’s nice to see an insider like Adair Turner, rattling a few cages.

Looking at the US finance sector, what the Joe Sixpack on the street sees is a sector which grew from 8% of S&P 500 market cap in 1990 to almost 25% at the height of the housing boom when the Fed’s federal funds rate was 1%; which owns Congress in the words of Sen. Dick Durbin (“frankly own the place”), Obama’s former Illinois colleague – – an estimated $5 billion spent in lobbying and campaign contributions over a decade; gigantic payouts when even in a recovery, the real incomes of most American workers were falling; and Uncle Sam acting as a backstop to even for the likes of Goldman Sachs when it makes most of its money from hedge fund type operations.

Wall Streeter James Grant has written in The Wall Street Journal, that Wall Street is usually described as an industry, but it shares precious few characteristics with the metal-fasteners business or the auto-parts trade. The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders. Rather, they open their doors to pay their employees — specifically, to maximize employee compensation in the short run. How best to do that? Why, to bear more risk by taking on more leverage.

Grant cites Morgan Stanley, which had a ratio of assets to equity of 33 times at year-end 2007 from 26.5 times at the close of 2004. In 2007, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.

“They borrow to the eyes and pay themselves lordly bonuses. Naturally — eventually — they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government’s first responders — the Fed, the Treasury or the government-sponsored enterprises — bearing the people’s money,” he said.

Last July, when Nymex crude hit an all-time record high of above $147 a barrel, investors had about $300 billion outstanding on energy indexes, roughly four times the level in January 2006, according to the International Energy Agency.

So when Citi energy trader Andrew Hall presses for his $100 million payout because his risky bets paid off, should Joe Sixpack wonder if part of the spike in his gasoline bill was not related to fundamentals, but to the likes of Andrew Hall?

The other side of the gambles got an airing last February when Deutsche Bank trader Boaz Weinstein, who was earning about $40 million p.a., was reported to have lost $1.8 billion in 2008, erasing more than two years of trading gains.

DB chief Dr. Josef Ackermann, told analysts that to earn a $1.5 billion profit from proprietary trading the bank needed to risk several times that amount in capital. “You can easily lose two to three billion. That’s what we have seen in 2008 and something we don’t want to see again,” he said.

Lord Turner’s remarks are much more appropriate to the U. Kingdom than to the other Anglo-Saxon economies (I assume that, as far as economies are concerned, Ireland for some reason is classed as an Anglo-Saxon economy).

The United Kingdom has a unique problem that the others (and certainly not Ireland) don’t have. Namely, abysmal industrial performance over a very long period of time. In 2009 the volume of manufacturing output in the U. Kingdom is lower than in 1973 (yes: 1973). In 1973, over 8 million were employed in manufacturing industry in the the U. Kingdom. In 2009, that is down to 2.5 million. Some U. Kingdom economists blame the growth in the financial services sector there for the long-term decline in manufacturing, the theory being that the best talent has shied away from engineering and such like because of the availability of lucrative careers in financial services.

Other Anglo-Saxon economies have fared much better in manufacturing than the U. Kingdom, therefore the argument is much less relevant to them. The U. States and Canada have both recorded significant growth in manufacturing output in recent decades that is not only much higher than the U. Kingdom, but much higher than non-Anglo-Saxon economies such as Germany, France and Italy.

And Lord Turner’s argument certainly does not apply to Ireland. In 2009, the volume of manufacturing output in Ireland is nearly 10 times what it was in 1973 (compared with an actual fall in the U. Kingdom), While, in 2009, the number employed in manufacturing in Ireland is higher than in 1973 (compared with an almost 70% fall in the U. Kingdom).