Mr. Keenan and Political Economy

A common jibe that journalists and politicians level at academics they disagree with, or perhaps just plain don’t like, is that the academics are disconnected from reality by virtue of their ivory tower employment. In relation to economists, this often takes the form of the tired line about the discipline originally being called “political economy” and academics putting forward proposals that are “good economics” but “bad politics”.

Brendan Keenan’s column in today’s Sunday Independent is a classic example of this genre. Mr. Keenan argues that the various economists associated with this blog (the “dissident economists” formerly known as “opinionated economics lecturers”) are politically naive and their advice unsound. Specifically, Keenan proposes that we would be better off if, contrary to recommendations emanating from this site, the government had paid more to the banks for the NAMA loans and demanded lower capital ratios.

There is such a thing as political economy. Anglo would still have been a nightmare, but a somewhat more generous payment from Nama, and a less stern view on bank capital, would have made the numbers a lot less frightening.

That might have made it easier to get the deal with the trade unions approved, and get another unpleasant Budget through in December. Not only better politics, but possibly better economics than worrying about Tier One capital and Long-Term Economic Value.

I’m not sure that either the politics or the economics of this column are particularly compelling.

In relation to the politics, Keenan points to public anger at the amount of money that is being used to recapitalise the banks and observes that:

Postponing some of this — by paying more for the loans and under-capitalising the banks — would have been less shocking to the public, albeit more galling to the economists.

I am not sure why Mr. Keenan is so confident that the public would have been just fine with overpaying for the NAMA loans by another €5 billion or €10 billion or whatever he’d prefer. If Keenan thinks the Irish public isn’t annoyed about the amount of money being forked over by the government to the banks to acquire the NAMA loans, then he must be mixing with some interesting people.

Moreover, there is a relatively simple calculus here in relation to what is best for the taxpayer. Paying an extra €1 billion for NAMA’s loans gets us precisely nothing as we just get the same old loans. Using that €1 billion to instead recapitalise the banks gets the taxpayer a share in banks that can later be sold off. If Keenan thinks public anger could be reduced by paying more via NAMA (which gets us nothing) and less via recapitalisation (which gets us something) then he appears to have little faith in the intelligence of the Irish public.

In relation to the economics, Keenan’s call for a lower capital requirement – undercapitalising the banks (his words) – is a recipe for continued tight credit which would strangle any recovery in the economy. Keenan may reckon that “worrying about Tier 1 capital” is an ivory tower business. However, while he may wish that capital levels for Irish banks be set solely by the Irish Central Bank and perhaps be subject to political influence, the fact is that there is an international process underway involving the G20, BIS and EU that will set new higher minimum capital levels for banks everywhere.

It appears likely that all banks internationally will need to achieve eight percent equity ratios at the conclusion of this process. Leaving the banks undercapitalised this year would be an invitation to them to obtain the required higher equity ratio by reducing assets rather than raising new equity capital. This would produce an ongoing squeeze on credit.

Also on the economics, Keenan reckons that the academics “got their way” on the NAMA pricing (though we’re still cribbing about it, malcontents that we are) and that it’s now clear that these prices are not “a fix.” However, while the prices paid for the assets are going to be lower than originally envisaged (thanks largely to the European commission) the fact that AIB is being left with an equity level that is some small figure just above zero suggests that the pricing is still being rigged somewhat to avoid certain levels of state control.

In relation to funding the recapitalisation, Keenan has another swipe at economists:

There are promissory notes and other kinds of IOUs to keep down the costs of bank rescue over the next few years and defer them to later.

This, too, may strike economists as bad practice, but it is more practical.

I don’t know why economists would criticise issuing promissory notes as “bad practice”. But then I also don’t know why this keeps down costs or “defers them to later.” Yes, promissory notes are IOUs but so are ordinary government bonds: Does issuing a ten year debt security keep costs down because it “defers costs to later”? In truth, there’s nothing particularly clever about using promissory notes to recapitalise banks, even though Mr. Keenan told his readers last year that this couldn’t be done because banks require something called “real money” to be recapitalised.

I’d conclude here by noting that while amateur political punditry can be fun, when it comes to economics, the public should be inclined to trust those who have a track record of showing they understand the key issues. In relation to this, readers may be interested in reviewing the podcast of Prime Time’s panel involving Mr. Keenan and Morgan Kelly just after the passing of the bank guarantee in September 2008.

The whole clip is worth watching but I’ll highlight two passages.

Brendan Keenan: I think the difficulty is – we know what the Irish banks bad loans are. They’re going to be about 1% of their loan books.

Morgan Kelly: No. That’s complete nonsense. We have a situation, Irish banks have lent 25…

Brendan Keenan: (interrupts) You disagree with Deutsche Bank?

Morgan Kelly: Yes.

Brendan Keenan: You disagree with Morgan Stanley?…

Morgan Kelly: (interrupts) I disagree…

Brendan Keenan: You disagree with all the analysts that say that?

Morgan Kelly: I disagree entirely. They have 25 Billion in loans to builders. All the ghost estates you can see around the place, that is the capital of the Irish banks, right now. They are going to make horrific losses on these.

And this one, in relation to the blanket guarantee decision:

Brendan Keenan: If it’s a Swedish banking crisis, then of course it won’t work and then it’s made a horrible mistake. But the proof of the pudding will be in the eating and I don’t see the figures or the conditions that suggest to me that this is a Swedish situation.

Morgan Kelly: I disagree entirely.

Indeed.

48 thoughts on “Mr. Keenan and Political Economy”

  1. Karl,

    You are being grossly unfair. Its the Sunday Independent we are talking about. You expect too much. Remember this is a paper that publishes opinion polls of 500 people where the totals sometimes incredibly top 100%.

  2. @All

    “Dissidents” around here! Never!

    “I disagree … I disagree … I disagree entirely… I disagree entirely …” (The Dissident Morgan Kelly Likert Scale)

    Kelly vs Keenan – No Contest.

  3. Brendan Keenan’s approach seems entirely consistent with almost everything that’s been asserted by political figures and most of the press for a very long time. Essentially they seem to believe that the Irish population is better off with “Not quite the truth, subtle variants of the truth, and anything but the truth.”

    Unfortunately, neither the Irish political class nor the Irish press, seem to have much sympathy for the idea that “The facts are your friends”.

  4. I often wonder how you keep this up Karl. People in Ireland just seem to have a weird aversion to “intellectuals”; I fear you may be spinning your wheels.

  5. @ Karl Whelan,

    It appears likely that all banks internationally will need to achieve eight percent equity ratios at the conclusion of this process. Leaving the banks undercapitalised this year would be an invitation to them to obtain the required higher equity ratio by reducing assets rather than raising equity. This would produce an ongoing squeeze on credit.

    The problems of Irish banks need to be defined in ways other than that which can be understood in the language of basic economics mechanisms alone. What Ireland is facing is an economic crisis similar to that which confronted the eastern block countries after the collapse of the USSR. Whatever skills Ireland might have had in terms of banking, we lost outright during the heady decade of lending to property speculators. We simply don’t have the time in to wait for a new generation of Irish bankers to re-grow, who know how to lend into a real economy. I disagree completely with Vincent Browne’s analysis in today’s Sunday Business Post. The whole discussion about light regulation is boulder dash in my view. What we had in Ireland was a banking and financial infrastructure that was too dominated by political interference of all sorts. We have paid a heavy price for that today. Everyone. In that real sense, politics and economics are very intertwined, but not in a good way. I don’t buy into the argument of Patrick Honohan. That of restoring confidence to Irish banks. You cannot restore confidence in a soccer team who do not have anyone capable of playing. You simply replace the squad and buy a squad who can play. We have so much opportunity and potential here in Ireland staring up plainly in the face. What we don’t have are human resources capable of organising the real economy, to take advantage of our strengths. That is my biggest criticism of Brendan Kennan to be honest. I always read what Garrett Fitzgerald, Alan Dukes in the Farmers’ Journal have to write. But the problem is, those men grew up in a pre-technology era, before the internet, before google, facebook and twitter. They are incapable of understanding, the old defensive strategies of ‘balancing the books’ are no longer appropriate. Only the team who can take to the field and the game to competition is going to survive going forward. BOH.

  6. http://www.tribune.ie/news/article/2010/apr/11/new-top-finance-adviser-to-earn-more-than-brian-le/

    “The Department of Finance recently advertised for the key position of head of financial services division with a salary of €198,568 – over €7,000 more than Lenihan’s €191,417 salary.

    A spokesman for the public appointments’ service – the state’s recruitment agency – said that it already had a number of enquiries for the position, which is open to all.

    “This is a huge job that will be so important for the country and the economy and the interest shown so far has reflected that,” said the spokesman, who added that the closing date for applications is on Thursday.

    The job is at ‘second secretary general’ level in the Department of Finance and is to replace the former head of financial services, Kevin Cardiff, who landed the top job in Finance earlier this year as overall department head – the most powerful pub lic service job in the country.

    The job will entail complex financial negotiations with the banks over toxic loans and, accordingly, the department warns the successful applicant “will need to be resilient, determined, flexible and calm under pressure”.

    While no specific financial qualifications are required, the Department of Finance stressed that the successful applicant must have a “deep knowledge and understanding of the financial sector”.

    Mindful of the need to take a stronger line with the banks than might have been the case to date, the department adds that the person will have the capacity to “deal assertively and forthrightly with the financial services industry”.

    The person appointed will report directly to the government and Lenihan on Nama and support the stability of the banking system, so knowledge of “complex financial structures, corporate finance principles and financial market function” is a key requirement for the job.

    suggestions anyone? Karl – a bit more than a prof even in UCD makes? Twice what a lowly associate prof makes…
    God…one would like to see the rationale they would use to say “ix nay” to Dr Whelan…
    Karl for FinanceGuru

    (note: above offer excludes anyone who doesnt really want to…)

  7. @ All,

    I listened to the podcast of PrimeTime episode September 30th 2008, (the day of the bank guarantee) which Karl Whelan has linked to in his original post. I must add if I may, what Morgan Kelly states is that other banks outside of Ireland don’t have the confidence to lend to Irish banks. What is going on here? That is the point in the whole system of banking in Ireland, where we should worry about confidence I agree. But in terms of Patrick Honohan, government of the central bank of Ireland getting worked up about the confidence of Irish banks themselves to lend, I am entirely positive, that he is barking up the wrong tree. The simple fact we have to remember here, is that Keenan, Honohan, Dukes, Garrett Fitzgerald and all of these individuals grew up in a time of much, much less opportunity in Irish society. Their views ultimately betray that reduced vision, which marked their own times. I wrote a blog entry, School of Innovators not so long ago. I had in mind to tailor it to short term graduate students to do in simple modules for a certificate of attendance). But if constructed properly, such a School of Innovators could be of value in getting conversations open between those in banking and those leaving university, and perhaps many academics and amateur economic pundits (of all generations) besides. BOH.

    http://designcomment.blogspot.com/2010/03/school-for-innovators.html

  8. Mr. Keenan point has some validity. It might have been more politically acceptable to over pay by a greater factor for the bad loans and thus reduce the capital requirement. I would also suspect that this was the govt’s and indeed the Irish bankers preferred option.

    However, I think this became politically difficult when the ECB/EC spooted the ruse. Whether or not this site or FG’s Senator Regan’s late intervention played any part in scuppering FF’s cunning plan iwill be determined by historians.

    I nominate Prof. Lucey for the job in DOF if only for his wheeze of selling the unprofitable Anglo deposit book for 21bn. Now that would have been “some stroke” worthy of my political hero. Deputy Tull McAdoo TD.

  9. @ Tull,

    However, I think this became politically difficult when the ECB/EC spooted the ruse. Whether or not this site or FG’s Senator Regan’s late intervention played any part in scuppering FF’s cunning plan iwill be determined by historians.

    Yes, regarding defensive tactics that Ireland Inc. will have to use over the next decade or so, we are playing on the same playing field of referees such as Matthew Elderfield, Karl Whelan and the European Commission. But it is also important to understand, the wider opportunities offered by the European playing field, from Ireland Inc. and it’s offensive economic tactics over the next decade also. Which I attempted to describe in my own words in blogs such as Anarchy in Research. Which I based around a quote in a paper by K. Vela Velupillai, In Praise of Fostering Anarchy in Research and Teaching. BOH.

    http://designcomment.blogspot.com/2010/04/anarchy-in-research.html

  10. I would also suspect that this was the govt’s and indeed the Irish bankers preferred option.

    Ya think?

  11. @Karl Whelan
    “In truth, there’s nothing particularly clever about issuing promissory notes, even though Mr. Keenan last year told his readers that this couldn’t be done because banks require something called “real money” to be recapitalised.”
    Indeed and it is not only Mr. Keenan who is not, eh, keen an them (sorry). Mr. Bacon was specifically not keen on the banks getting zero coupon bonds as the NAMA bonds.

    There has been a consistent line spun that because the US banks are getting a free carry trade from the US treasury and federal reserve, that the Irish banks should get some arbitrage too. Lend (!) to the government at euribor+ in return for equity that doesn’t pay dividends and bust loans, and borrow from the ECB at euribor-…

  12. “It appears likely that all banks internationally will need to achieve eight percent equity ratios at the conclusion of this process. Leaving the banks undercapitalised this year would be an invitation to them to obtain the required higher equity ratio by reducing assets rather than raising equity”

    Is there any evidence to support that statement? That if a bank has sufficient capital that it will embark on equity raising and not choose to de-lever anyway?

    (that’s apart from using tomorrows regulation as if it were today’s btw!)

  13. Brendan Keenan normally sounds to be quite sane when he appears on Vincent Browne but this and recent interview with Minister Lenihan show that he is just another Independent hack.

    Speaking as one from the more political end of this forum, his claims to understand the politics of political economy are not well founded. The general public don’t want the banks to get any money whether it comes from NAMA or through capitalisation. For the most part people don’t differentiate. The more thinking ends of public opinion think it better that we get a share holding rather than overpay through NAMA, but this of course only applies to AIB and BoI. The 70% of all funds going to Anglo are anathema to the entire population.

    But his justification for this slow motion attitude to dealing with the banks is pure FF spin. And in the end it descends into the dark secret at the heart of government. he writes: “But there may be some theoretical merit in waiting for something to turn up — in this case the economy.” Micawberism rules OK.

    Everything that Minister Lenihan has done at every stage has been the minimum necessary to get through that week or month. Lenihan has staked everything on the (GDP) economy recovering from 1st July and for taxes to start rolling in that same afternoon.

  14. @ Karl Deeter,

    Have you read the Alan Greenspan paper that Philip Lane featured in a recent blog entry here at the Irish Economy. I noticed this part of the Alan Greenspan’s paper. Think about it for a second. Why haven’t all the hedge funds fallen one after the other? If one was the look for something to fail, based on experience in the 1990s, it would have been hedge funds. No one saw this thing with toxic assets and sub prime loans coming. Although, Morgan Kelly seems to have done. Brendan Keenan obviously did not. Which is one of Karl Whelan’s point if I understand it. The advantage of adequate capital saves loads of effort on the Irish regulators part, trying to pin the tail on the next donkey. You see the utter confusion even on September 30th 2008, with Kelly and Keenan on PrimeTime. Matthew Elderfield also has a serious shortage of the right staff. When Elderfield gets the right staff, maybe then we can think about what Keenan talks about, sailing closer to the wind etc. BOH.

    Pre-crisis regulatory capital requirements based on decades of experience designated pools of self-amortizing home mortgages among the safest of private instruments. And a surprisingly, and unfortunately, large proportion of investment portfolio decisions were essentially subcontracted to the (mis-)judgments of credit rating agencies.

    That regime is now moot. Capital and liquidity requirements mandated for individual lenders are now apparently adjusting to the upward revised market judgment that the negative tail of risk distribution was underestimated. Private markets accordingly now, as I noted earlier, are requiring economic capital and balance sheet liquidity well in
    excess of, soon to be amended, Basel II.

    [ Break ]

    Moreover, capital has the regulatory advantage of not having to forecast which particular financial products are about to turn toxic. Certainly investors did not foresee the future of subprime securities or the myriad other broken products. Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.

    http://www.irisheconomy.ie/index.php/2010/03/19/alan-greenspan-the-crisis/

  15. @ Karl

    The only bad publicity is no publicity. News at One today and all. Don’t take the job in the DoF. Hold out for a better offer like Dr Doom.

  16. @ Karl Deeter,

    In other words, the Irish banks lack risk management skills and they certainly don’t have confidence at the moment. Yes, Keenan is correct about the telephone book numbers the minister for Finance Brian Lenihan had to announce for re-capitalisation. But what Keenan does not see, is banks in Ireland are thoroughly spooked. By giving them the higher levels of capitalisation, is will remove one other road block in the way of the Irish banks building up some level of confidence. The other thing now, that will give Irish banks confidence, and enable them to focus properly on real tasks, is that NAMA unifies debt associated with the biggest players into one organisation. For the past decade, the big Irish developers really played a game of cat and mouse with Irish banks, and had a ‘bit’ going on with everyone. At least the Irish banks now are spared that kind of BS, for a while. Does that make sense? Put yourself in the shoes of a young thirty something year old bank associate today, about to press the ‘loan’ button on his or her desktop. Yeah? BOH.

  17. Ah lads…

    Journo’s have to deliver product daily/weekly.
    If Academics had to do the same, it would change the character of their work to… less scholarly?

    I have read Brendan Keenan for years and will continue to do so.
    His quality has been alot more consistent that many others over the 20 something years I have been reading him.

    I dont agree with him this week, but I get to read him on thur and sun, on the next thing. Trying to pidgeon hole everyone in this country as for/against, etc, etc does no one any benefit.

    One interview with B Lenihan and he is in the dungeon with the rest of the catamites???

    Good night

  18. @ Al,

    I have read Brendan Keenan for years and will continue to do so.

    I’ll be honest, I buy the Thursday Independent often, just to read Keenan’s article. I don’t look at the rest of the paper. I wouldn’t just buy the Indo to read David McWilliams however. Although, McWilliams as part of the Sunday Business Post does add value for me. That and Vincent Browne’s column on the back page always brightens up Sunday mornings. Friday’s Irish Times, the business section, is the one I hate going without, any week. Thumbs up. BOH.

  19. @ Karl and Lucey

    I don’t see any big problem here. Brian Lucey tells us that Anglo could offload its 28bn of deposit liabilities and receive 21bn of assets in return, a 49bn miracle windfall which will blow all this problem away. If only we had academics like Brian in charge of our national finances.

  20. Well, just as long as we don’t start getting academics trying to be journalists and vice versa. That kind of crossover would, I suppose, bring intellectual scandal to both professions.

  21. @yoganmahew

    There has been a consistent line spun that because the US banks are getting a free carry trade from the US treasury and federal reserve, that the Irish banks should get some arbitrage too. Lend (!) to the government at euribor+ in return for equity that doesn’t pay dividends and bust loans, and borrow from the ECB at euribor-…

    That’s the spin for our loan to Greece:

    Government sources said the Minister was likely to bring forward the legislation “in the coming weeks”, adding that the State could well make a profit on any loans it extends to Athens. Ireland’s contribution – between €450 million and €500 million, according to sources – will be set in line with the State’s 1.64 per cent holding of share capital in the European Central Bank.

    While the Government currently borrows at about 2.35 per cent over a three-year term, the cost of a three-year fixed-rate loan to Greece under the deal struck yesterday would be about 5 per cent. This would be significantly less than the rate at which Athens currently borrows, which is in excess of 7 per cent.

  22. Good economics is always good politics, but it takes politicians of some calibre and economic literacy to convince people of its merits. Politicians who have displayed stupendous economic illiteracy and who fuelled a false boom to secure and retain power are singularly ill-equipped to persuade voters of the need for major economic adjustment. In seeming to criticise economists who are advancing good economics Mr. Keenan, implicitly, is conceding the political weakness of the Government’s position and the questionable democratic legitimacy of the actions it is taking – as well as the lack of transparency in the decision-making process.

    I suspect some of the more perceptive strategists in the Government camp might not be best pleased at Mr. Keenan’s highlighting of its weakness and illegitimacy in this way. The critique, from an economic perspective, is very valuable. But it is not helpful to seek to evade the logical conclusion of this critique: this Government is both unwilling and unable to make and enforce the economic policy decisions that will minimise damage to future economic prosperity.

  23. @Brian O’Hanlon

    Those are interesting points but they don’t answer the specific question: is there a defined correlation that shows that a bank will automatically run out to raise equity rather than delever based on its capital? (don’t mix tier 1 with capital general)

    Why wouldn’t a bank ultimately do this anyway? Deleveraging actually makes the equity proposal more attractive in the future, meaning any issuance will have more investor attraction due to an implied reduction in the institutions risk. The international deleveraging has been happening, and will continue to happen – it is not contingent on capital injections.

  24. (posted this on another topic yesterday)

    I think Brendan Keenan is misjudging the politics of the situation though. A NAMA which makes serious losses could have devastating effects for Fianna Fail in the long-term. Furthermore, whilst people may be disgusted at the amounts being paid to the banks, it does illustrate clearly the true magnitude of the problem. That in turn should help in garnering acceptance of the necessary reforms and measures.

    I also think Brendan Keenan is neglecting the international aspect to this. Brian Lenihan said the loan transfers to NAMA would be credible. This is because they have to be credible to inspire confidence in our national debt levels. Overly generous prices could fatally undermine the notion that the NAMA debt should be viewed as separate from the national debt because it is backed by valuable assets. The idea that we could sneak less credible prices past them strikes me as a bit fanciful, though maybe the international financiers really are that thick.

    Brendan Keenan rightly says that a solution which fixes the banks to a degree that enables them to assist in the economic recovery is the minimum which must be done now. I think it is incompatible to suggest that keeping the capital requirements low and over-paying for the loans would have been enough to position the banks so they can assist in the recovery. As Colm McCarthy has repeatedly pointed out, the losses have already occured. Not recognizing them will not cure the problem. As Alan Ahearne has pointed out, banks failing to recognise their losses and therefore not properly recapitalising has been a disaster in Japan (although some would say Japan may have done as well as could be hoped for).

  25. BTW, I recently watched “The Lives of Others” so being called a ‘dissident’ didn’t seem that bad. Today I hear that dissident republicans have launched a bomb attack on in the North. The flavour of the word is less savoury after that.

  26. @al

    as far as I can see Karl submits insights here on a daily basis which are much more informed than Mr. Keenan….hack he may be but the least he could do is get the facts right

    @all

    Mr. Keenan must think the Irish public have very low IQs, we can add, we can subtract and we can even draw our own conclusions when given the correct information…….it might be politically expedient if FF understood this, FF motto for the next election “You Can’t Handle The Truth”

  27. The promotion of some form of civil economic disobedience would seem a reasonable identifier of ‘economic dissidence’. If commentary is anything to go by, many pundits hold that the government is no longer listening to the electorate’s frustration with bank refinancing. Yet despite dissatisfaction, no political party, professional association or labor collective has pushed for a campaign of non-payment of mortgages. What needs to happen for the government to concentrate its mind on the financial anxieties of citizens?

  28. @Al Chemist,

    How can you have a non payment of mortgage campaign? The bank has your current a/c. Maybe you could ask to be paid in potatoes and hairy bacon, but that is against the Truck Acts.

  29. @tull mcadoo

    If the account debited for the mortgage does not have sufficient funds at the time of debit…

  30. I can’t say I agree with Mr Keenan’s logic that it is desirable to pander to ill-informed opinion out of political necessity. Higher discounts are in the public’s interest. If the public is poorly informed, isn’t it better to explain why rather than allow them believe overpaying for loans is better. I’ll go out on a limb and give it a shot:

    I have to spend 2 euro on fruit. Like it or lump it, I’ll be spending 2 euro on fruit. The vendor offers me 4 apples and 1 orange. As I am the only buyer and the apples look overly ripe, I push for a fairer or better deal. I offer 2 euro for 4 apples, 3 oranges and 1 banana.

    It mightn’t capture the finer points, but even a monkey would identify the better deal (Ok, I admit loading the monkey odds by including the banana).

  31. @Zhou

    Police and Justice transferred to Belfast at 12.00 last night.

    @Paul Hunt +1

    @All
    Brendan Keenan is a journalist – and the Indo has been rather ‘establishment’ of late ……….. and in support of Keenan, he does recognise the danger of freedom-lovin free-mawrketeering ideologies(more dangerous than Marxism!) ……….. even if he does get a mite confused between the orthodox, the mainstream, the heterodox, and the dissident.

    I wonder would Profs Lane, Lucey, and Whelan self-describe as ‘heterodox’? I jest of course – takes one to know one (-;

  32. It is an error to equate ‘political economy’ with ‘economic decisions taken by political actors’. Political economy is more than just pointing out the obvious: technocratic decisions face political constraints and are mediated by specific interest group constellations. It is an academic tradition that favours an examination of national economies as institutionally embedded in a whole variety of different ways and in specific policy domains – wage bargaining, fiscal policy, industrial policy etc.

    It is a tradition that challenges the deductive neo-classical assumptions of classical Smithean political economy. The fundamental premise is that markets are social and political constructs. Therefore – it examines the institutional framework within which market interactions occur. This places firms and government actors at the centre of its explanations for specific observable outcomes.

    Thus, political economists tend to view an OECD ‘science of the economy’, (one size fits all approach) as lending itself to poor policy decisions. This is not because they require political choices (they do) but because the configuration of historically evolved institutions requires context specific policy responses. So, in this regard it would question the entirety of assumptions behind the policy response by both the Irish government and the EU commission.

    The most refined ‘political economic’ analysis is the ‘Varieties of Capitalism’ approach (Hall and Soskice, 2002). This approach argues that there are two types of political economy – Liberal Market Economies (USA, UK, and Ireland) and Coordinated Market Economies (Germany, Japan). Firms in the former rely upon market to resolve coordination problems whilst firms in the latter (CMEs) rely upon non-market forms of strategic interaction. Others argue for a more heterogeneous approach to the study of comparative capitalism (Crouch, 2005). That is, there are many more types’ political economy and not just ‘two’. In fact, it is better to examine regions and sectors than macro-national economies.

    So, in the current economic crisis a political economist would ask the following question – what political and institutional conditions enable the Irish government to adopt a policy that gives €22bn to a bank that will never put a cent back into the Irish economy? Or, why have some economies adopted a revenue based response to the crisis whilst others have adopted cost cutting measures? Or, why have some governments adopted a multi-lateral approach with trade unions and employers whilst others have adopted a unilateral approach?

  33. @Aidan R

    Good stuff.
    “… a political economist would ask the following question – what political and institutional conditions enable the Irish government to adopt a policy that gives €22bn to a bank that will never put a cent back into the Irish economy? Yes – we could do with more here on ‘varieties of capitalism’ …

    …. and an off-the-cuff response to your question:

    (i) inter-connected upper-echelon POWER (ii) motive (bury secrets for 30 more yrs) (iii) opportunity (the state acts) (iv) path-dependent cronyism over 40 yrs (v) supine citizenry/serfs

  34. I generally like reading Brendan Keenan’s material; he doesn’t blow his own trumpet or just provoke controversy to get attention.

    On the current issue, there surely has been a surfeit of spoof and window dressing.

    Wouldn’t a bit of honesty/straight talking be worth trying?

    1. Last year’s case for NAMA that it would have a big impact on the flow of credit was never credible.

    2. As for the trade unions and the public pay deal, rather than seeking to make the case for bank bailouts more credible, wouldn’t it be more potent to address the inconvenient truth that the benchmarking payment was made without conditions, contrary to the recommendations of the first report and what had been stated as Government policy by the Minister for Finance?

    http://www.finfacts.ie/irishfinancenews/article_1019286.shtml

    3. The media provides the oxygen for spin.

    Today there was the example of Batt O’Keeffe’s “landmark investment” announcement of 300 promised outsourcing jobs in Cork.

    As most of the clients are Irish firms, there was of course no estimate of net jobs.

    Why spoil good news and another recent case was IDA Ireland, which could not confirm the estimate of job losses in its Horizon 2020 strategy report for the period 2000-2014.

  35. @All
    Keenan’s mistake was to be totally honest. The establishment would love to kick all this into the next decade. That was probably the original plan but the NAMA process took such a long time (due to the banks own shoddy practices?) that the property market had clearly declined and the public mood and the public debate on NAMA’s proposed 30% discount reflected this. Keenan is an establishmenty type and so therefore unsurprisingly he has been slow to come to terms with the scale of the bubble we had. But it also makes him an excellent indicator of what official Ireland thinks. He is I believe completely sincere and well-intentioned. However, the time for stokes and fixes and dodges – ESPECIALLY involving billions, banking and the transfer of public wealth to private interests, as NAMA does, – has surely passed.

  36. @ Ahura Mazda,

    I had a flick through Peter Shiff’s re-released book, Crash Proof 2.0 today. In regards to residential property, Schiff noted it makes sense to buy big ticket items like houses – or rental property as he call it. If you don’t buy, you need to rent. If you buy, you automatically save on rent, and that saving can be offset against payment on the debt you accept in order to own the property. You essentially become your own landlord, and it leads to situation where tenant and landlord have a good working relationship – because they are the same person. What Schiff does not agree with, is people who borrow money to overpay for a property, on purpose on hope assumption there will be a stupid-er monkey out there. All the monkeys can now argue together, how NAMA affects the marketplace in which all monkeys have to do business. But it was dumb monkeys who did not know their apples, oranges and bananas who caused all the trouble. There was serious , apple and sometimes banana gambling going on. BOH.

  37. @ Zhou_Enlai,

    Furthermore, whilst people may be disgusted at the amounts being paid to the banks, it does illustrate clearly the true magnitude of the problem. That in turn should help in garnering acceptance of the necessary reforms and measures.

    I was reading something today which mentioned in 1995, Alan Greenspan spoke to the US estate agents to explain to them how much residential prices underpin confidence of people on main street. Everyone can collectively agree how far market values have fallen. It is a reality. There is no joy in that for many people, but there is a definite sense of realisation. When we talk about confidence as it affects the economy in Ireland, I would break it into three levels. The level of the ordinary punter on mainstream as described. Above that, there is the level of confidence in the banking institutions – as referred to by prof. Patrick Honohan in his The Week in Politics, interview in December 2009. Then above that again, there is a confidence which needs to exist at a level described by Morgan Kelly in the September 30th 2008 Prime Time episode linked above by Karl Whelan. In addition, I would like to point people to a Ciaran O’Hagan article which appeared in the Sunday Business Post on April 4th 2010. I suppose O’Hagan is describing something connected to confidence, which is appetite for risk, which Greenspan tried to quantify in his most recent paper also. BOH.

    http://archives.tcm.ie/businesspost/2010/04/04/story48371.asp

  38. Drat! No edit function. Sorry. Then above that again, there is a confidence which needs to exist at a level described by Morgan Kelly in the September 30th 2008 Prime Time episode. That is, the confidence of other banks to lend to Irish banks. I.e. Bondholders scared off. Which had all but disappeared on the evening of September 30th 2008.

    Re: Ciaran O’Hagan SBP article: It appears to me as though appetite for risk has been quantified in somewhat mechanical terms by O’Hagan and by Greenspan. (In contrast to confidence which is best understood without the paraphenalia of economics maths sometimes – to go back to Maynard Keynes, behavioural-ism etc) As supply of government bonds with sufficient yields dry up, the traders are forced into down into riskier areas. O’Hagan says,

    If that’s the case, it makes sense to grab as much yield as you can now. Indeed, Irish bonds seem to be the new fetish. The other higher-yielding eurozone sovereign, Greece, is still seen as too risky. Portugal and Spain are also in the cooler, while Italian yields are already too low to be attractive.

  39. @ Karl Deeter,

    Why wouldn’t a bank ultimately do this anyway? Deleveraging actually makes the equity proposal more attractive in the future, meaning any issuance will have more investor attraction due to an implied reduction in the institutions risk. The international deleveraging has been happening, and will continue to happen – it is not contingent on capital injections.

    Complex stuff indeed. Perhaps this is not a definitive answer yet, but my mind is still turning it over. De-leveraging as you describe it, has to be connected in some way with disposal of foreign subsidiaries doesn’t it? In the case of AIB at least. I quote Karl Whelan from IE, March 30th 2010: The media gives the impression that much of the €7.4 billion will be obtained from “asset disposals.” However, despite what the Minister’s speech says and despite what you hear every day from financial journalists, banks don’t actually raise capital by selling assets. If a bank sells an asset and gets cash, it has changed the composition of its assets but it hasn’t raised capital. There are some technical issues to do with valuation of goodwill and other stuff, but the principal thing that selling Polish and US subcomponents does is shrink the size of the bank. It reduces RWA and so the capital ratio is raised. To which ‘tull mcadoo’ responded: Not sure you are correct about asset sales. Broadly speaking, if a bank sells the asset for above the carrying value in the balance sheet it is a capital gain and accretive to capital. Poland and M&T meet this crieteria. AIB would struggle to make book value for its UK subs. @ Karl Deeter, my question is this: How does one rationalise, on the one hand, the de-leveraging process you describe, with the overseas asset disposal process on the other? What you [Karl Deeter] are suggesting of Irish banks getting their affairs in order (you are talking about perception of potential Irish bank equity holders), prior to an equity proposal. Accepting that AIB’s Polish subsidiary had desposits exceeding assets, and thereby was funding the wider group. I don’t know Karl, is AIB is losing useful assets (overseas subsidiaries) and reducing its exposure to Irish domestic assets, Irish mortgages and personal loans (de-leveraging) going to work? The objective of such an effort being, I presume, so AIB bank can present itself to buyers in a better light? If only there was a way AIB could hold onto overseas assets, and ditch some of the domestic stuff. Maybe to a third banking force? That would improve its ratios wouldn’t it, and make AIB more attractive to buyers? I think we need to separate all of the above from the problem that Morgan Kelly indentified on the Prime Time episode of September 30th 2008. Which is to do with confidence of banks who lend to Irish banks (bondholders), and trying to prevent runs on deposits (you and me, or institutional). Sub note: Your [Karl Deeter’s] question reminds me of an article in yesterday’s Sunday Business Post by Samantha McCaughren, NTR gets set to address funding conundrum. I quote: A streamlined business clearly focused on renewable energy could be an easier story to sell to the market, sources suggested. Greenstar and the toll road business could be shed to help focus the message. But then you have to consider that NTR’s business and that of Irish banks is not the same. What the Irish banks are doing is not so much ‘streamlining’ their business, so much as watching years of painstaking acquisition work, swirl around the outlet and go down the pipe. From an article, AIB goes back to its roots as the great offload begins, by David Clerkin’s in yesterday’s Sunday Business Post, While it will be difficult for Doherty to swallow the overseas disposals, the shrinkage of his empire will be even more painful as it will deprive him of units that have come through the meltdown in better shape than the mother ship. BOH.

  40. @All

    Many complain about the lack of an ‘edit function’. OK. Lets build an edit function, and licence it, and make a few bob.

  41. @ Brian O’ Hanlon,

    My apples and oranges solely relate to NAMA. I’ll confuse myself if I try to expand it :). Apples are the toxic loans going to NAMA, oranges are shares in the banks. You can reason that the upfront cost to the taxpayer is the price paid for the loans plus the amount of capital the banks will need. This upfront cost should be quite stable (higher loan discounts require more capital, lower loan discounts require less capital). The thing is the price tag to the taxpayer will be roughly the same.

    Given the taxpayer will be paying a certain amount; it’s worth looking at what we get for our money. Regardless of what discount NAMA buys the loans at, the loans have the same value. So really it’s the %age bank shareholding the taxpayer takes that increases the value of what the taxpayer will hold. So back to my example, we’ve committed to spend 2 euro on fruit and buying apples is part of our purchase. We’re the only buyer. The vendor tells us his apples are worth 1.70 euro so he’ll throw in an orange to bring it to 2 euro. We tell the vendor his apples are worth 80 cent and require substantially more oranges.

  42. @Ahura Mazda – “So really it’s the %age bank shareholding the taxpayer takes that increases the value of what the taxpayer will hold.”

    Surely the banks will pull every trick they can to dilute that shareholding over time?

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