Month: March 2010

AIB Preliminary 2009 Results

AIB’s preliminary results for 2009 are here. There’s some new NAMA-related information but not much. The bank is transferring loans with previous book value of €23.2 billion to NAMA, down from earlier estimates of €24.1 billion. The provisions of €4.2 billion against these loans, corresponding to an 18 percent writedown, are presumably a holding operation until the actual transfer involving a larger writedown.

In relation to stories about AIB shrinking credit, I heard references on the radio this morning to the bank shrinking its loans to customers from €129.5 billion in 2008 to €103 billion in 2009. This is only correct if one accepts the accounting treatment of the €19 billion the banks expect to receive from NAMA as “financial assets held for sale to NAMA” rather than “dodgy property-related loans that have been written down a bit.” I’m sure the bank is restricting lending but it’s not as easy to get loan books down as fast as the “loans to customers” line suggests.

Postbank and Anglo Not Comparable

There are many aspects of the government’s handling of the Anglo Irish Bank fiasco that are open to criticism. However, this doesn’t mean that every Anglo-related criticism of the government is accurate. Today’s Irish Times column by Fintan O’Toole has an appealingly simple argument that I suspect will get repeated a lot in the coming weeks:

Yesterday, Postbank, jointly owned by An Post and BNP Paribas, stopped taking new business. It will close by the end of the year. Its name would suggest that Postbank is actually a bank, but this must be an illusion.

If it were a bank, Postbank would not be allowed to fail. And Brian Lenihan’s reaction to its closure was merely to say that he is “disappointed [his favourite word] but not surprised”.Why does the closure of Postbank get a c’est la vie shrug of the shoulders while the closure of Anglo is so unthinkable that at least €30 billion of public money is being used to keep it, if not actually alive, then apparently undead?

The answer Brian Lenihan would give is that Anglo is of “systemic importance” to the Irish economy, while Postbank is not.

O’Toole then correctly points out that Postbank has lots of branches and customers.

The problem with this argument is that it is based on a confusion of the meaning of the words “close” and “fail” in the context of the banking sector. Postbank is a subsidiary of BNP Paribas Fortis and that bank is not going out of business. Every one of Postbank’s depositors will get their money back and BNP’s withdrawal from Ireland has no implications for its bondholders.

In contrast, when we discuss letting Anglo fail, we aren’t talking about shutting down its nonexistent branch network. What we mean is acknowledging that the bank is insolvent (and Fintan is correct that claims in January 2009 that Anglo was solvent were indeed ludicrous) and then having it declare bankruptcy. Normally, such a decision would lead to Anglo’s creditors not getting all their money back. However, if we did that now, we would face the problem that the Irish government has guaranteed essentially all of Anglo’s liabilities, so no money would be saved for the taxpayer.

My point here isn’t to defend the scale of the September 2008 guarantee or its extension to Anglo but merely to acknowledge that the issues related to Anglo are completely different to those related to Postbank.

Elaine Byrne’s column today also focuses on Anglo with reference to Iceland! She discusses whether, if the Iceland!ic referendum passes, we should follow suit and not pay off Anglo debts. There will be more discussion of this question in the coming months.

There are major decisions still to be taken in relation to reducing the costs to the taxpayer of resolving Anglo and other banks that appear to be only NAMA over-payment away from insolvency. We could decide to just remove the guarantee and let all the banks declare bankruptcy. But this would have, let’s say, some short- to medium-term implications for the functioning the Irish banking sector.

With the September 2008 guarantee set to expire later this year, there is the opportunity in the coming months to arrive at an orderly resolution process in which insolvency is recognised, bad property assets are cleared off the bank balance sheets, providers of risk capital lose money in a way the reduces cost for the taxpayer, and the banks are placed back on a sound footing.

These are very important decisions and the sooner our more influential journalists recognise what the real issues are, the better the public debate will be.

The Economics of ‘Something Must be Done’

There is a strand in what passes for policy discussion which goes like this:

(i) There is an acknowledged problem in some sector or policy area;

(ii) the Government could  do something to ameliorate this problem;

(iii) QED the Government should do something, not always specified.

The result of this line of attack is policies like the Car Scrappage Scheme, of which more anon.

Examples in this morning’s media concern the excess supply of hotels, and the threat of global warming. The Government is being urged to take measures

– to reduce the hotel stock, and

– to support the hydro storage/windpower project called Spirit of Ireland.

Hotel Stock: Hotels are a pure private good. Due to policy-induced capacity expansion, there are now too many. Some are bust, and face receivership/liquidation/NAMA.  Room prices are falling. This is the natural market response. Where is the market failure?

It is true that some long-established hotels have seen their business undermined by State-subsidised competition, but this is a routine business risk in an interventionist political culture. Many of these long-established hotels enjoyed State grants for conference/leisure centres when the going was good. The industry is lobbying for some State-run scheme to take out capacity. Doing nothing will cost less and the industry will adjust. Intervening, yet again, will distort adjustment.

Spirit of Ireland: The externality of carbon emissions is addressed by putting a price on carbon, at which point the State can safely adopt a position of technology neutrality. Power generation, once externalities are dealt with, is a pure private good too. Whether these schemes make sense is a matter for the capital market, not for the Government.

Car Scrappage: Car sales have collapsed and some car dealers have gone out of business. The same has happened with €1,000 handbags, and some handbag retailers are struggling. Ireland manufactures neither cars nor handbags. The Car Scrappage Scheme will spend taxpayer money to sustain, temporarily, the retail distribution network for an imported consumer durable. Why not a Handbag Scrappage Scheme? This scheme is plain daft for Ireland. It is not even clear that it makes any sense for car-producing countries – the German scheme appears to have sucked in imports of smaller cars, which Germany does not produce. 

These ‘Something Must be Done’ schemes provide harmless entertainment for economists, fodder for the 24-hour news cycle and a playpen for lobbyists. But they contribute nothing to sustainable employment, cost the Exchequer money and hinder the necessary post-Bubble adjustment.  

In contrast, the Economics of Doing Nothing is that this is often the best policy, and the cheapest.

Wasting money on roads?

A number of stories on roads funding have been in the media over the last few weeks.

Firstly, Frank McDonald in a piece in the Irish Times had a go at the motorway building programme of the NRA. In particular he criticises the plans for the Slane bypass (N2 Dublin to Derry). That story was also picked up in Today FM’s Last Word (Matt Cooper) last Thursday.

The rationale for the bypass project involving a new bridge over the river Boyne is straightforward. Currently a significant volume of traffic of which about a quarter is HGVs (some 1600 per day) negotiate the steep valley on both sides of the river which is crossed via a narrow bridge. The nature of the roads has been blamed for a number of serious accidents involving HGVs, and hence the bypass is to be built to reduce accidents.

But why are there so many HGVs on a road connecting Ashbourne (population 6500) with Ardee (population 4000)? The answer is simple once on considers that the N2 runs almost parallel to the tolled M1, which is both quicker and safer. In other words the HGVs are on the N2 to avoid the toll, and now the tax payer is going to help them avoid the toll by building a new expensive bridge and dual carriageway. The simple, cheap and obvious solution to the problem of HGVs going through Slane is to ban them from doing so, as I argued in May 2009. This would also avoid all the hassle of forcing a major construction project through an area rich in archaeological sites and historic significance. I wonder is this a case for the Comptroller and Auditor General?

Secondly, on the 22nd of February Minister for Transport Noel Dempsey announced €411.408 million for 2010 Regional & Local Roads Programme. Of course the Minister did not announce any extra resources, rather he is reprofiling expenditure that was to go to road improvement. Given the damage to many roads due to the flooding in the autumn and the frost over the winter most people will welcome these resources.

But is this money going to be well spent? When it comes to potholes it is curious how they always appear in the same places, and often they are back soon after they were filled. Likewise, the same stretches of road (surprisingly many for a country where rain is not uncommon) are also subject to flooding on a regular basis, with consequent road damage. It is also peculiar that our road surfaces melt at the first sign of the sun (even over recent poor summers), again leading to significant damage.

In that context engineering and material standards should be reviewed in order to minimise future damage and costs before spending €400 million on repairing roads.

I am not against spending money on roads – anyone who has read my work on public investment will know that – but we should make sure we use the scarce resources we put into roads to best use.

Financial Crisis Inquiry Commission: Testimony by Academics

A number of prominent academics testified before the US FCIC last week  – you can download the background papers here.