By Richard TolFriday, January 22nd, 2010
In today’s Irish Times
By Richard TolFriday, January 22nd, 2010
Conservation and behavior change alone will not get us to the dramatically lower levels of CO2 emissions needed to make a real difference. We also need to focus on developing innovative technologies that produce energy without generating any CO2 emissions at all.
People often present two timeframes that we should have as goals for CO2 reduction – 30% (off of some baseline) by 2025 and 80% by 2050.
I believe the key one to achieve is 80% by 2050.
But we tend to focus on the first one since it is much more concrete.
We don’t distinguish properly between things that put you on a path to making the 80% goal by 2050 and things that don’t really help.
To make the 80% goal by 2050 we are going to have to reduce emissions from transportation and electrical production in participating countries down to zero.
You will still have emissions from other activities including domestic animals, making fertilizer, and decay processes.
There will still be countries that are too poor to participate.
If the goal is to get the transportation and electrical sectors down to zero emissions you clearly need innovation that leads to entirely new approaches to generating power.
Should society spend a lot of time trying to insulate houses and telling people to turn off lights or should it spend time on accelerating innovation?
If addressing climate change only requires us to get to the 2025 goal, then efficiency would be the key thing.
But you can never insulate your way to anything close to zero no matter what advocates of resource efficiency say. You can never reduce consumerism to anything close to zero.
Because 2025 is too soon for innovation to be completed and widely deployed, behavior change still matters.
Still, the amount of CO2 avoided by these kinds of modest reduction efforts will not be the key to what happens with climate change in the long run.
In fact it is doubtful that any such efforts in the rich countries will even offset the increase coming from richer lifestyles in places like China, India, Brazil, Indonesia, Mexico, etc.
Innovation in transportation and electricity will be the key factor.
One of the reasons I bring this up is that I hear a lot of climate change experts focus totally on 2025 or talk about how great it is that there is so much low hanging fruit that will make a difference.
This mostly focuses on saving a little bit of energy, which by itself is simply not enough. The need to get to zero emissions in key sectors almost never gets mentioned. The danger is people will think they just need to do a little bit and things will be fine.
If CO2 reduction is important, we need to make it clear to people what really matters – getting to zero.
With that kind of clarity, people will understand the need to get to zero and begin to grasp the scope and scale of innovation that is needed.
However all the talk about renewable portfolios, efficiency, and cap and trade tends to obscure the specific things that need to be done.
To achieve the kinds of innovations that will be required I think a distributed system of R&D with economic rewards for innovators and strong government encouragement is the key. There just isn’t enough work going on today to get us to where we need to go.
The world is distracted from what counts on this issue in a big way.
Gates is saying what I and others have been saying all along. Perhaps people will listen to him.
By Karl WhelanThursday, January 21st, 2010
Following on from last week’s post on Barclay’s and their comments on TBTF European banks, it’s interesting to see that President Obama today announced that he will be proposing legislation that will limit proprietary trading activities of large banks as well as impose limits on their growth in liabilities. Pretty clearly, whatever gets proposed isn’t going to please former IMF chief economist, Simon Johnson, but it’s still good to see these issues being addressed.
I’d guess it’s highly unlikely that any such bill would get passed through the US Congress—and I would have said this even before yesterday’s Senate election in Massachusetts. Indeed, I suspect Obama probably also figures it’s a long shot and that this annoucement and the proposed bank tax are primarily smart political moves from the President: “So if these folks want a fight, it’s a fight I’m ready to have” is just the kind of language to get the currently disappointed Democratic base charged up and it’s probably not a bad fight to have lost and thus have as a live issue going into the midterm elections.
From a European perspective, I suspect this may be an area where there would be more political agreement in Europe than in the US. An optimist might hope that the calls for limits on bank size from Lord Turner and other senior figures in the UK could lead to agreement at European level. Even more optimistically, one might hope that this could be an issue on which the new European Systemic Risk Board could also make some running to show it’s not just going to be a talk shop. A pessimist might reckon that both the EU and ESRB are far too unwieldy to make progress on such a complex issue.
By Karl WhelanThursday, January 21st, 2010
Today’s Irish Times carries an excellent article by Mike Casey, formerly head of economics at the Central Bank, listing questions he believes should be addressed by the banking inquiry.
(guest post by Michael Burke)
Today’s Financial Times carries an interesting piece from Martin Wolf on the severe difficulties being faced by Greece as it attempts to come to terms with its current economic crisis. http://www.ft.com/cms/s/0/eeef5996-0532-11df-a85e-00144feabdc0.html
The FT’s veteran commentator places Greece’s plight in the overall context of developments within the EU, and so has something to say about Ireland. Without minimising the problems of any country, he clearly shows that it is Greece which is an extreme case, not, as is often claimed here, Ireland.
“The problems of Greece are extreme, because it alone of the vulnerable eurozone member countries has both high fiscal deficits and high debt. Other countries with large fiscal deficits are Ireland (12.2 per cent of GDP in 2009) and Spain (9.6 per cent). But, while net public borrowing was 86 per cent of GDP at the end of 2009 in Greece, according to the OECD, in Ireland and Spain it was only 25 and 33 per cent, respectively. Meanwhile, Italy, with a net debt ratio of 97 per cent, had a deficit of “only” 5.5 per cent. Portugal is in the middle, with net debt of 56 per cent of GDP and a deficit of 6.7 per cent of GDP. Thus, the challenge for Greece is larger and more urgent than for the others.”
He also warns that those pinning their hopes on export-led growth are in perliously crowded boat in choppy waters, as they now comprise (at least) 70% of the world’s economy.
Finally, he has a very illuminating chart of unitl labour costs based on OECD data. Although the chart is small, the trend for Ireland is clear and unmistakeable. Ireland has already experienced a sharp reduction in unit labour costs relative to Greece, Italy and Spain. Of course, Germany is an outlier, with unit labour costs way below that group. But, although it isn’t stated by Martin Wolf, that’s based on the much stronger growth of German investment.
By Liam DelaneyWednesday, January 20th, 2010
Alan Ahearne’s Paddy Ryan Memorial Lecture at NUI (for now) Galway is available below. He gives a rationale for current government banking and fiscal policy (HT Stephen Kinsella).
Minister Batt O’Keeffe announced this afternoon that the Government has decided to scrap the National University of Ireland. UC Dublin, UC Cork, NUI Maynooth and NUI Galway were the constituent colleges. The total number of universities in Ireland has thus been increased, at a stroke, from four to seven. Ireland should now soar up the universities-per-capita league tables.
Sadly, it will no longer be possible for the NUI to play the role envisioned for it in the 1950s by Flann O’Brien (Myles na Gopaleen). He ended an Irish Times controversy about academic snobbery and the excessive use of academic titles by proposing that NUI should simply confer doctorates on all Irish citizens at birth. Although the government appears to have embarked on a slower progress toward the same destination.
There will now be a difficulty in arranging the next Seanad election, for which the graduates of NUI form a constituency. Unless of course….
By Karl WhelanWednesday, January 20th, 2010
Last month, we discussed how the the EU had prevented AIB from paying coupon payments on certain bonds, which will prevent them from paying dividends on the government’s preference shares, which in turn will trigger the right of the National Pensions Reserve Fund Commission (NPRFC) to acquire ordinary shares equivalent to the amount of the dividend. Bank of Ireland has now made a similar announcement. Here’s the press release. The highlight:
In accordance with the terms of the 2009 Preference Stock, the NPRFC would become entitled to be issued, on February 20, 2010 or on a date in the future, a number of units of Bank of Ireland Ordinary Stock (based on the average trading price of Ordinary Stock in the 30 trading days prior to February 20, 2010, assuming the Ordinary Stock was settled on that date) related to the cash amount of the dividend that would otherwise have been payable (€250m), should there be no change in these circumstances. The Bank is, however in ongoing discussions with the Department of Finance and the EC on this and other related matters as part of our overall engagement on the Bank’s restructuring plan and accordingly, this outcome is not certain.
So they’ve got a month to engage their way out of what would be a serious dilution of the current private ownership, even prior to any recapitalisation required by the losses triggered by NAMA.
By Karl WhelanTuesday, January 19th, 2010
After repeatedly ruling out the idea that a banking inquiry would occur in the near future, the government has now released its own proposals for exactly such an inquiry. The formal proposals are here (this is an amendment to Labour’s proposal) while the Minister for Finance’s speech on the issue is here.
The essence of the proposals are as follows:
The inquiry will have two stages.
First, the Government will immediately commission two separate reports - one from the Governor of the Central Bank on the performance of the functions of the Central Bank and the Financial Regulator and the second from an independent ‘wise’ man or woman with relevant expertise to conduct a preliminary investigation into the recent crisis in our banking system and to inform the future management and regulation of the sector. These reports will also consider the international, social and macro-economic policy environment which provided the context for the recent crisis. I expect both reports to be completed by the end of May this year and laid before the Houses shortly thereafter.
The second stage of the inquiry will be the establishment of a statutory Commission of Investigation which will be chaired by a recognised expert or experts of high standing and reputation. The terms of reference for this commission will be informed by the conclusions of the two preliminary reports. The aim will be for the commission to complete its work by the end of this year. Its report will then be laid before the Oireachtas for further consideration and action by an appropriate Oireachtas committee.
A couple of initial observations. First, as I understand it, it seems unlikely that the second stage will involve any public hearings. The Commissions of Investigations Act of 2004 (link here) states that:
A commission shall conduct its investigation in private unless (a) a witness requests that all or part of his or her evidence be heard in public and the commission grants the request, or (b) the commission is satisfied that it is desirable in the interests of both the investigation and fair procedures to hear all or part of the evidence of a witness in public.
Neither (a) or (b) seem too likely to occur.
Second, to my mind, the request that the Governor of the Central Bank be charged with writing the definitive report on its past performance puts Patrick Honohan in an invidious position in light of the fact that he will have to work on a daily basis with many of the staff who remain on from the previous regime.
Third, the terms of reference only go up to events up to September 2008. I would prefer to see the date extended at least up to early 2009 as there are serious questions to be asked about the Regulator and Department of Finance’s understanding of the scale of the problem facing our banks and the advice they received from outside sources such as PWC (see here and here).
Here is an interesting attempt to quantify the effect of recessions on mortality in EU countries. (To access the full article you will have to go to a subscribing library.) The authors claim that rising unemployment is associated with more deaths from violence (suicide and homicide) and alcohol abuse, but fewer deaths from road accidents. No significant effects were identified on other causes of mortality. The net effect on overall mortality is very small.
Two countries - Finland and Sweden - are identified as having social support policies in place that are particularly effective in mitigating the adverse health effects of rising unemployment.
This case is an embarrassment for DCU. But I was particularly taken by the following:
He [Mr Justice Geoghegan] said he was not entering into discussion of the other two grounds, as this would have required analysis of section 25(6) of the Universities Act 1997, dealing with the dismissal of employees by universities.
Given the unusual circumstances of this case, it was not advisable that the court should give a precise meaning to that subsection, Mr Justice Geoghegan said.
“Furthermore, any such analysis would lead to a judgment as to the meaning of the word ‘tenure’,” he added. “I am satisfied that the word ‘tenure’ has different meanings and connotations partly depending on its context and partly depending on the particular understanding as usually given to it within the country in which it is used.”
He added that it did not necessarily have the same meaning in this jurisdiction as it did in the US, where it meant permanency in a university post.
If this is not what tenure means in Ireland, then perhaps someone might want to inform the academics?
By Richard TolSunday, January 17th, 2010
Dr Rajendra K Pachauri has been the chair of the Intergovernmental Panel on Climate Change (IPCC) since 2002. The IPCC is a United Nations body charged with summarising the academic literature on climate change. The IPCC is not allowed to give policy advice. Dr Pachauri has freely advised all and sundry about climate policy, as is his right as the citizen of a democratic country. The media has often reported Pachauri’s personal views as the scientific findings of the IPCC. Pachauri has done too little against that.
The Fourth Assessment Report of the IPCC reported a number on glaciers on the Himalayas that was wrong. This has now come to light. Instead of admitting error (and a minor one), Pachauri again declared that the IPCC is infallible and even denounced (in no uncertain terms) a recent study on Himalayan glaciers for disagreeing with the IPCC. UPDATE: OUCH
Such blunders reveal why the Bush administration so keenly supported Pachauri. It does not stop there.
Since he was appointed IPCC chair, Pachauri has taken up a raft of advisory positions, almost exclusively with companies that stand to benefit from climate policy. This is against the conflict of interest policies of the two mother organisations of the IPCC (which, astonishingly, does not have such a policy itself). Pachauri’s mother organisation, TERI, also appears to have benefitted from Pachauri’s side jobs. [UPDATE: Forgot to include this link, which suggests that Pachauri has made a habit of these things.]
To top it all off, Pachauri is a director of a charity, TERI Europe, whose accounts are being revisited after Richard North uncovered irregularities.
All this is blowing another major hole in the credibility of climate research.
Adding this to the failed negotations at Copenhagen, I doubt that Europe will strenghten its emissions targets. As the Netherlands has now joined the queue of countries that report difficulties in meeting the renewables target, we may even see less stringent climate policy.
UPDATE: The Irish Times was quick to publish my op-ed on this and related matters.
By Colm HarmonFriday, January 15th, 2010
An ‘interesting’ take on the Irish economy by the New Statesman is at http://www.newstatesman.com/economy/2010/01/ireland-irish-social-dublin
Martin Wolf has an article on Iceland in today’s FT. The concluding paragraph is worth quoting in full:
they – and everybody else – must learn the really big lesson here. The combination of cross-border banking with generous guarantees to creditors is unsustainable. Taxpayers cannot be expected to write open-ended insurance on the foreign activities of their banks. It is bad enough to have to do so at home.
By Philip LaneThursday, January 14th, 2010
You can read the latest NCC study on this topic here.
By Karl WhelanThursday, January 14th, 2010
Following up on yesterday’s post about farmers and the IFA, today’s Irish Times reports that the government “is to introduce a statutory code of conduct for grocery retailers and suppliers, in spite of opposition from the bigger operators.” It is also being introduced despite opposition from the ESRI and the Competition Authority. Still, “newly elected president of the IFA, John Bryan, welcomed the announcement.”
By Philip LaneThursday, January 14th, 2010
Many congratulations to Kevin O’Rourke on being the first Irish-based recipient of the prestigious European Research Council Advanced Investigator Grant for a project to research the inter-relationships between trade, trade policy and the Great Depression: you can find out more details here.
By David MaddenThursday, January 14th, 2010
It was only last night that I heard that Terry Baker, formerly of the ESRI, had died on January 3rd (see http://www.esri.ie/irish_economy/quarterly_economic_commen/ ). Readers of an older vintage will recall his role as chief contributor and editor of the Quarterly Economic Commentary in the 1980s. I worked as a Research Assistant with Terry on a number of these and his modus operandi was to take my numbers, tables and clumsy sentences and magically transform them into the most elegant prose. A pretty mean table tennis player too, if I remember. RIP.
By Karl WhelanThursday, January 14th, 2010
The troubles of developer Bernard McNamara are receiving a lot of coverage: Stories about it in today’s Irish Times are here, here and here, while McNamara’s interview on RTE yesterday is available here (starts 40 minutes in – hearing him blame professional valuers for him paying too much for the Glass Bottle site was priceless).
It is worth noting that, as with Liam Carroll, the fact that Bernard McNamara borrowed some money from outside the network of NAMA-bound banks (in this case, €62.5 million from clients of Davy’s clients) is the only reason that we are able to see the true state of his finances.
And, of course, these stories raise the following question: Since Carroll and McNamara are hopelessly insolvent, who exactly is going to account for the eighty percent of NAMA’s loans that its business plan tells us will be paying back in full?
Barry Eichengreen makes the case here, without having to warn about Western protectionism.
By Karl WhelanWednesday, January 13th, 2010
For most people, one of the few positive elements of the current slump is that the sharp decline in the cost of living has somewhat cushioned the blow of declining nominal incomes. But deflation has not been a good thing for everyone. In particular, farmers have been hard hit by declining food prices.
One can only have sympathy for farmers who are struggling with current market conditions. However, the current campaign by the Irish Farmers Association (IFA) aimed at blaming retailers for falling prices is based on poor economics and its calls for policy intervention should be resisted by government.
In due course Ireland needs to have a functioning banking system which is adequately capitalised, does not impose excess costs on the productive economy, and does not enjoy any free insurance on its liabilities. The exit strategy from the guarantee is critical.
The banking problem for countries like Ireland is not addressed by the separation of commercial from investment banking - the Irish banks did’nt collapse through casino losses, but through explosive balance sheet growth and huge loan write-offs, a very old-fashioned commercial banking failure. Countries that have stood behind investment banks need to think about too-big-to-fail issues, reviving Glass-Steagal, much higher capital ratios and so forth, but this is not the Irish problem.
Nor is it clear that, cet par, having ten commercial banks rather than three helps either. If all ten were to behave in the same way, you are in the soup anyway. The fisc ends up as lender of last resort in the Eurosystem as currently operated. But the fisc is’nt big enough to credibly underwrite the next failure in several countries, and the fisc in Iceland clearly not big enough to underwrite the last one.
Unless full-blown EMU emerges soon, with all commercial banks covered by a European FDIC with centralised European regulation and supervision, the implication is that the size of the domestic banking system which the state can stand behind must be constrained by the fiscal capacity of that state. In Ireland we got it wrong by permitting domestic bank balance sheets to expand beyond what could comfortably be supported by the fisc, and then failed to supervise them. Iceland made the same mistake muliplied by three or four. Scotland emerges as the smartest small European country, through not voting for the Nats.
The implication is that the contraction of Irish bank balance sheets is not just an important component of de-leveraging, it is necessary in order to match the state’s capacity to its responsibilities. Shifting existing assets off bank balance sheets through market transactions would complement NAMA, and help to avoid adjustment through an excessive restraint on, for example, working capital lending to private business.
It is difficult to see how an explicit deposit insurance system can be avoided, on a much bigger scale than the pre-crisis scheme. When push came to shove, it transpired that we had a much bigger scheme than we thought, and one which the banks cannot pay for. The next one should avoid any element of taxpayer subsidy.
Given the scale of the risk-to-the-fisc, commercial banking is an industry in which small European countries should plan to punch below their weight. Shame the Irish banks were’nt bought out in a European consolidation!
The target size for the aggregate balance sheet of the domestic banks needs to be addressed in designing the exit strategy, and it would help if the Central Bank could arrange to publish a new table in the monthly bank return for guaranteed banks.
By Karl WhelanMonday, January 11th, 2010
One of the themes stressed by the BarCap research is that the funding problems of weak banks are likely to see stronger, better-funded, European banks growing bigger at their expense, thus exacerbating the Too Big to Fail problem.
This isn’t a theoretical issue. Former IMF Chief Economist Simon Johnson has been flagging for some time that the crisis has seen the biggest six banks in the US substantially increase their overall share of bank assets. Johnson’s recent AEA presentation is well worth reading. It paints a depressing picture in which the rescue of the financial sector has boosted and emboldened the leading banks and, with a timid and perhaps compromised US Treasury unwilling to act, Johnson seems to be predicting an even larger crisis down the road.
It’s hard to know how much to agree with this diagnosis. Johnson is hardly the only person discussing this as a serious issue. For instance, Mervyn King has spoken in very strong terms about this issue, for instance in this speech which has many choice quotes including:
Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.
Andy Haldane’s “doom loop” speech is further evidence of how seriously the Bank of England takes this issue.
In the US, while the Treasury has clearly whiffed so far on this issue, influential voices such as Paul Volker and St. Louis Fed President Thomas Hoenig have also emphasised the importance of dealing with TBTF. Even more officially, the Basle Committee is apparently now looking in to special treatment of global banks that are deemed to big to fail. So perhaps there are reasons to think that, um, this time might be different.
Still, with leading international banks making money again and huge bonuses back, it’s hard not to get the sinking feeling that the bankers will be able to water down proposals for tighter regulation and that we could heading down the same path yet again.
An old friend has alerted me to this short note which has impressive pictures, and gloomy implications as far as Ireland is concerned.
By Karl WhelanMonday, January 11th, 2010
There’s been some discussion in comments here of some recent Barclay’s Capital research on the European banking sector and it raises a number of issues worth putting on the front page. (The Sunday Tribune also had a couple of nice articles using the Barcap research; one by Ian Guider and one by our old friend Jon Ihle.)
The BarCap research is not publicly available but FT’s Alphaville column dedicated three articles to it.
The first deals with the report’s discussion of twenty banks that it deems as Too Big to Fail. The list includes both Bank of Ireland and AIB, giving Ireland ten percent of Europe’s TBTF banks, so yet again we’re punching above our weight. The report discusses the implications of the TBTF banks having to carry additional regulatory capital because of their status as a particular risk to fiscal stability. AIB and BOI stand out as having the biggest capital requirements.
The second deals with the maturity profile of the outstanding senior debt of these 20 banks. Bank of Ireland stands out, in particular, as having very substantial funding problems this year. This point is further discussed in Jon Ihle’s article linked to above.
The third article discusses the idea that economic improvement may lead to credit losses turning out to be less than expected this year. I’d be surprised if the credit loss picture for the Irish banks improves much this year.
By Karl WhelanMonday, January 11th, 2010
The ECB is unhappy that the guarantee continues to cover interbank deposits:
The extension of a guarantee to cover interbank deposits should be avoided as this could entail a substantial distortion in the various national segments of the euro area money market by potentially increasing short-term debt issuance activity across Member States and impairing the implementation of the single monetary policy, which is a unique competence of the Eurosystem under Article 105(2) of the Treaty.
They also appear to be unhappy that the guarantee does not have a minimum maturity:
In the same vein, the ECB’s recommendations on government guarantees state that ‘Government guarantees on shortterm bank debt with maturity of three to 12 months could be provided so as to help revitalise the short-term bank debt market.’ Moreover, it is noticeable that under the draft scheme there is no stated minimum maturity for any guaranteed liabilities which means that liabilities with a maturity of less than three months may be guaranteed in practice.
The ECB’s concerns about national guarantees interfering with the normal operations of interbank money markets are not restricted to Ireland. Here’s a similar opinion offered on an Austrian extension of interbank guarantees.
The ECB also notes about the Irish guaratee scheme that
for the sake of transparency, a more precise indication should be given on the method to be used to calculate the fees.
These opinions are consistent with various earlier warnings from the ECB Executive Board members about their plans to remove their exceptional extension of credit and to return to their normal operational framework. Unfortunately, we are now being repeatedly reminded that those who told us that the ECB would be lending €54 billion to Irish banks were not at all accurate.
I have one gripe with the piece: it wasn’t only ugly Americans (and eurosceptic Little Englanders) who were €-sceptical. Here is a newspaper article by Peter Neary, for example, written in 1997, and I have already linked to a longer 1997 piece by Neary and Thom, as well as to a 2000 article by Thom and myself that make my own feelings on the subject pretty clear.
More important, however, are PK’s concluding comments:
Was the euro a mistake? There were benefits — but the costs are proving much higher than the optimists claimed. On balance, I still consider it the wrong move, but in a way that’s irrelevant: it happened, it’s not reversible, so Europe now has to find a way to make it work.
I couldn’t agree more. The logical move at this stage (and some cynics thought this was the point of EMU all along) would be a move to fiscal federalism, so as to smooth out asymmetric shocks, but the French and Dutch votes of 2005 make that a pretty implausible scenario. It is the logical move, though.
By Philip LaneMonday, January 11th, 2010
Gary McGann [Smurfit CEO] gives his views on the Irish economy in this FT video .
By Philip LaneMonday, January 11th, 2010
The FT has quite a lot of articles and letters on the Iceland situation. This op-ed provides an interesting historical perspective on the gains to debt repayment.
Paul Krugman has a piece today that is aimed squarely at Americans and their prejudices regarding Europe. But his point that social democracy and good economic performance are not mutually incompatible could be backed up with more evidence than his simple US-EU15 comparison. Within the EU15, the Scandinavians and Germans are fairly obviously doing better than average. And when comparing EU-15 growth rates over time, the fact that jumps out is how rapid were the growth rates experienced during the 1950s and 1960s, when the welfare state was being constructed and consolidated.
There is also a vast literature demonstrating that social democracy, far from undermining the market, increases political support for it; and that income inequality makes ordinary people hostile to trade, immigration, and markets generally.