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.