Month: August 2010

The political impact of the Great Recession

Dan O’Brien has an optimistic piece in today’s IT on why the political effects of the crisis have not been as noxious as the impact of the Great Depression. He lists three reasons: incomes have declined, but from a much higher base; there are no credible political alternatives, such as were offered by communism and fascism in the 1930s; and we are more tolerant and less nationalistic today.

I am surprised that he doesn’t mention a rather obvious fourth candidate: the size of the economic collapse has been much less this time around (except in a few unimportant countries such as our own). The duration has been shorter, also, and I think that is very important: after 1929 some economies continued to contract until 1932 or 1933. And this crucial difference is due to different policy responses:  much more aggressive monetary policies, fiscal stimuli, and much more important automatic stabilisers.

The extent to which Europeans have become more tolerant can be exaggerated. In 1928, the Nazis only got 2.6% of the German vote. Contrast this to the 13.9% received by the anti-immigration Dansk Folkeparti in 2007, before our crisis started, or the 5.9% achieved by Geert Wilders’ revolting party in 2006. Since 2008, the political extremes have benefitted, just as Hitler did (the Nazis’ share of the vote jumped to 18.3% in 1930).  Wilders’ party received 15.5% of the vote in 2010, while the terrifying Jobbik got 16.7% of the vote in the first round in Hungary. Sarkozy has been actively courting the xenophobic vote in France this summer. There are probably a few other examples around which people could point to.

Severe recessions can still bring out the worst in people, it seeems.

The Enduring Influence of Ireland’s 1987 Adjustment

When I was a junior economist in short trousers, the first research I ever did was inspired by Ireland’s successful 1987-89 fiscal adjustment.  Many international researchers looked at Ireland and decided that our successful adjustment stemmed from consumers stepping into the breach filled by the government spending cuts. The story was that increased consumer confidence, fueled by expectations of lower future taxes, was the key to the recovery.

From the research I did on this topic (both on my own and with John Bradley) I came away fairly convinced that this was not what had happened. Rather, the 1987 boom seemed to be fueled more by strong exports to the UK thanks to Nigel Lawson’s tax cutting exercise.

However, Ireland’s 1987 experience continues to pop up in discussions of fiscal austerity. I have to admit that I’ve not been too impressed by Alberto Alesina’s work (here and here) on how fiscal adjustment can be expansionary—work that has had a lot of influence this year. Well, sure enough, Paul Krugman now cites work from Arjun Jayadev and Mike Konczal showing that the only country that ever cut its way to growth in a slump was, you guessed it, Ireland in 1987. The power of this datapoint endures.

Bike paths to somewhere

Olivia Kelly reports that the national cycle path network has been unveiled. As is all too common, there is no trace of this with the Department of Transport or the National Roads Authority. There is a powerpoint from January 2010, though, which is consistent with Kelly’s description.

I’m all for cycling. I cycle to work. I wish more people would cycle, so that there are fewer cars on the road (they’re a menace, not just to women). A proper cycling policy is one of the few ways in which carbon dioxide emissions can be cut fast.

The national cycling network disappoints. Its primary aim is to connect Ireland’s main towns. People do not commute by bike from town to town. The distance is too large. Bike commuters travel from the near suburbs to the city centre (and back).

The cycle paths are for recreation so. It is instructive to compare the NRA’s proposed network to the one proposed by Failte (page 19). The Failte one takes the cyclist through a scenic landscape from one place of interest to the next. The NRA one takes the cyclist on the shortest route from population centre to population centre.

Bikes are not cars. You use them in a different way for a different purpose.

Money Pit

This week’s edition of The Economist reports on the lrish banking crisis: you can read it here.

Alternative Stress Tests from OECD and Citi

One of the aspects of the CEBS European stress test exercise that has been commented upon quite widely is their decision to only apply haircuts to sovereign debt held on the trading books of the banks examined. However, most of these bonds are held on the “banking books” on the understanding that they are being held to maturity and the CEBS exercise assumed no sovereign defaults over the time horizon considered, so no haircut was applied to this portion of the bond portfolio.

In reality, the trading book\banking book distinction is arbitrary. In the case of a default or restructuring on these sovereign bonds, the distinction is meaningless. In the case of a bank failing, the distinction also doesn’t mean much: If the assets of the bank need to be sold off to meet liabilities, then bonds originally intended marked as hold to maturity the banking book may still have to sold off at market values.

I’ve come across two interesting alternatives to the CEBS stress tests. The first is this report from the OECD, which takes a macro look at the topic. They calculate that 83% of the exposure to EU sovereigns is held on the banking book and the report gives a good sense of the exposures of banks in different countries to various types of sovereign risk.    

The other alternative comes via the Calculated Risk “Some Investor Guy” series on sovereign debt. The Guy linked to this rapid response piece from Citi, redoing the analysis on a bank by bank basis. Applying the haircut to the banking book as well as the trading book, the number of European banks that fail the test rising from 7 out of 91 to 24 of 91.