In Billy Wilder’s classic movie “One, Two, Three” James Cagney plays a hard-charging marketing executive coaching his clueless son-in-law on the correct answers to give during an important job interview. The son-in-law is told to describe the current international situation as “serious, but not hopeless,” but during the job interview he mangles this and describes it as “hopeless, but not serious.” The interviewer is impressed with his originality and insight. The same mangled answer might apply to the current Irish economic situation: hopeless, but not serious. The corner has been turned. The Irish economy will now experience a slow, steady recovery as the IMF-guided programme unwinds the deep structural flaws that developed in the Irish economy during the credit-fueled bubble of 2002-2007. Continue reading “The Irish Economic Situation: Hopeless, but not Serious”
The fiscal plan is due to be published tomorrow. In this article, I look at some of the key issues.
Barry Eichengreen provides a reading list here.
His latest speech is here.
Over a VoxEU, Stanley Black suggests a way of breaking the EMU without breaking the Euro.
The IMF has just released a new Staff Position Note Lifting Euro Area Growth: Priorities for Structural Reforms and Governance
[One of the co-authors is Ajai Chopra]
Its recommendations for Ireland are:
1. In relation to the labour market:
- Introduce gradual decrease of benefits over time of unemployment spell and stricter job search requirements
- Provide more resources to the unemployment agencies (FÁS) to provide efficient job search assistance to the growing number of unemployed
- Review the level of minimum wage to make it consistent with the general fall in wages
2. In relation to improving competitiveness:
- Reform planning and licensing systems in net work industries, so as to increase competition in sheltered services sectors
- Focus public resources on high-priority projects in the knowledge-based economy
The completely nebulous nature of last night’s annoucements in relation to bank restructuring means we are no wiser today than yesterday about what is actually going to happen with our banks. However, the following statement from Michael Noonan (not a man given to reckless speculation, I would venture) is worth discussing:
Fine Gael finance spokesman Michael Noonan said there may be conflict between European officials and the International Monetary Fund the restructuring of Ireland’s banks.
Mr Noonan said the IMF may favour more burden sharing with bank bond holders than European officials as a condition of aiding Ireland.
As is this article by John McManus.
The statement is available here.
In the last 2 years or more, serious academic economists such as Morgan Kelly, Karl Whelan and other contributors to this blog have been subject to a campaign of anti-intellectual abuse by the ‘leaders’ of public opinion in Ireland. The ad hominem attacks on Brian Lucey were unforgiveable. Some of these opinion formers (those who work in the financial services sector) may shortly be unemployed. Those who remain should be shunned, certainly by academics.
However one name sticks out – former Taoiseach Garret Fitzgerald. Let me make my personal position clear: I can think of almost no one in Irish public life whom I have admired more. Let us not also forget that he served as a faculty member of the economics department in UCD for part of his career. Consequently, his “gratuitously condescending comments….. regarding the NAMA dissenters”, to quote Kevin O’Rourke earlier today, were particularly puzzling.
Garret, I know you have the dignity to restore your reputation. Now do so.
On This Week on RTE Radio One, just now, Brian Lenihan has admitted that his banking policies failed in the sense that the banking problem proved too big for the state to solve on its own.
The audio is now available here. Here’s the exchange about the failure of banking policies:
Richard Crowley: Our strategy failed. Could you not admit that now?
Brian Lenihan: Yes it did in the sense that the banks were too big a problem for the country. I accept that.
Richard Crowley: And the steps you took were not enough to prevent it.
Brian Lenihan: The steps could not, given the limited resources a small state has. Yes, I accept all that. But nobody has suggested they were the wrong steps.
The incredibly depressing thing about the banking meltdown is how predictable it all was. Click here for a post from a year ago that links to a presentation I gave to the Labour Party titled “The Banks After NAMA.” A few highlighted phrases:
“government argues that the NAMA loan transfers will fix our banks and get credit flowing. There are good reasons to believe that this is not the case”
“The banks have not developed a sustainable new funding model.”
“more losses to come: The severity of this recession will trigger big losses on mortgages, business loans, credit cards”
“major banks are seriously undercapitalised relative to the size of their balance sheets.”
“the ECB’s unlimited lending policy is likely to come to an end over the next year or so. What then?”
I guess we have an answer now to the last question.
There is a new ranking of business schools by EdUniversal.
Seven Irish institutes make it into the top 1000 (2 in the top 100, 4 in the top 700). The methodology is particularly vague, so I do not know what it means. The ranking is based on a composite of other rankings plus a survey among deans. It seems to be mostly about teaching quality.
Anyway, two Irish universities come out well, so that is good.
It is being reported (by eg Simon Carswell on the Irish Times website) that, in addition to the four-year fiscal framework, there will be an early resolution of the banking issues as part of the IMF/European deal.
De-leveraging the banks further through private sector deals for bank assets, including non-NAMA impaired assets, has long been an option, as argued here before. The tracker mortgages constitute an impaired (though performing) asset which can no longer be marked at par (as appears to have been the case) in computing the balance sheet hole if market disposal is contemplated. Carswell uses the phrase ‘heavy discounts’ and on the face of it the cost of funds, minus the c. 2% return on these mortgages, put them well under water. There are moving parts – the ECB funds are cheap, for example, and the replacement liabilities, and their cost, is unknown.
The banks wrote a very large piece of derivative business when they extended these mortgages and did not (or could not) hedge, so far as I can see. The risk is in the form of an uncovered exposure to an interest rate spread beyond their control. It looks as if this is about to be marked to market.
To explore Ireland’s chances of avoiding default, the tool of choice has been simulations of debt dynamics under various assumptions about growth rates, interest rates, primary balances and the direct costs of the banking bailout. Various domestic and international commentators have usefully produced such analyses, but they can be hard to compare given the combinations of assumptions involved. Unfortunately, there is still a lot of confusion about our chances of stabilising the debt ratio. An additional complication is that in their recent “Information Note on the Economic and Budgetary Outlook” the Department of Finance did not report their assumptions for interest rates and the primary balance. This makes it hard to do a clean sensitivity analysis of the DoF’s projections.
In a brief note (available here; associated spreadsheet here), I use a simpler decomposition of the change in the debt to GDP ratio than normal, but link the analysis closely to the DoF’s baseline case. Under their baseline, they project the debt ratio will peak in 2012 at 106 percent of GDP before falling to 101 percent of GDP in 2014. However, there is concern that the growth projections are too optimistic: 1.75%, 3.25%, 3.00%, and 2.75% for real GDP growth from 2011 to 2014. For some reason they do not report nominal growth rates for 2012 to 2014. However, the decomposition allows us to infer the nominal growth rate assumptions.
To test the robustness of the DoF’s projections, I examine a quite pessimistic growth scenario with just 1 percent real growth and 1 percent inflation (GDP deflator) in each year out to 2014 holding the projected deficits as a share of GDP at the DoF target levels. Under these assumptions the debt ratio is not stabilised — though we still come surprisingly close. Encouragingly, however, a sustained additional adjustment in the deficit equal to 1 percent of GDP in 2011 would stabilise the ratio at 112 percent of GDP in 2013. Moreover, combining the low growth scenario with a 10 percent of GDP increase in the starting debt ratio due to a higher bank bailout cost, we still have the debt ratio peaking in 2013, but at the higher level of 121 percent of GDP.
While the challenge of bringing the deficit down and avoiding explosive debt dynamics (and ultimately default) is daunting, I see these simulations as reasonably hopeful. Even under a quite pessimistic scenario on growth and banking costs — there may be views on whether it is pessimistic enough — the gross debt ratio is stabilised at what should be a manageable level for a high-income country. This also does not take into account our cash reserves and assets in the Naional Pension Reserve Fund, amounting together to 28 percent of GDP. Provided we have the political capacity to make the needed adjustments, the path through the crisis without default and back to creditworthiness is clear enough.
There has been a trickle of news on flood management (or lack thereof).
The Examiner has an op-ed by Minister Gormley, in which he claims that his only role is to provide money. The Oireachtas report (discussed here) notes institutional failures and a lack of leadership. Hickey reached the same conclusion (see here). Others have noted a lack of progress (here, here, here, here), although there are some positive, private developments (e.g., a flood alert system).
Flood management is one of those areas in which the authorities should take the lead — but different priorities were set.
This analysis piece in the FT provides a useful timeline of the international dynamics behind the bailout.
Antonio Garcia Pascual and Piero Ghezzi explain how a combination of a bank restructuring/recapitalisation fund and a line of credit for the sovereign can stabilise the Irish situation in this report.
Note: In relation to the discussion of the Goldman Sachs report (and presumably similar comments can be made about this report from Barclays Capital), it is certainly sensible to be aware of potential institutional biases. However, the individual economists working at these types of institutions are typically top quality (PhDs from top-level universities, strong academic publication records and/or experience in policy organisations) and, beyond any institutional pressures, have powerful individual career incentives to maintain a reputation for high-quality macroeconomic analysis.
In its latest European Weekly Analyst issue, the Goldman Sachs team run the numbers on possible bank losses in Ireland (the central scenario has NAMA being too pessimistic about likely losses). In addition, they provide a useful Q&A on the bailout talks. You can download it here.
In Irish Economy Note No.12, Greg Connor and Brian O’Kelly consider the costs of lax regulation during 2003-2008
Abstract: This paper develops a restrictive procedure for evaluating economic policy decisions, by comparing actual economic history to a simulated history where a specific policy decision is replaced with a counterfactual, but credible, alternative. Our procedure is theoretically straightforward, but empirically problematic since it requires the identification of a feasible policy alternative and a model linking a specific policy choice to subsequent economic outcomes. We apply the procedure to the mistaken decision to maintain an excessively lax financial regulation regime in Ireland during the period 2003 – 2008. We measure the differences in banking sector stability and national income that would have occurred if the stricter regulatory regime imposed in Ireland in 2009 had been put in place six years earlier. We find that a few simple, reasonably prudent regulatory controls on the Irish banking sector would have greatly limited the vulnerability of the domestic sector to the 2008 global credit freeze, and almost certainly prevented the 2008-2009 collapse of the domestic banking sector and the consequent deep Irish recession of 2009-2010. On the other hand, the risky and unsustainable inflow of foreign capital mediated by the domestic banks accounts for a substantial part of Irish economic growth during the 2003-2007 period. Without this net
foreign borrowing inflow, cumulative gross domestic product over the early period would have been substantially lower.
Next week sees a lot of activity on the seminar front.
1. Tuesday November 23
Economics and Psychology One Day Session: UCD Geary Institute
We will be hosting a session on Economics and Psychology in the UCD Research Building on November 23rd. Those who wish to attend should RSVP to Philippa Barrington at firstname.lastname@example.org. Please indicate whether you wish to attend the full-day session or the keynote lecture by Professor Laibson only. There is no registration fee.
Includes 4pm – 5.30pm: Keynote Speaker.
David Laibson (Harvard) “Natural Expectations and Economic Behavior”
More details here.
2. Thursday November 25
The second Geary Lecture of 2010 will be given by Professor Canice Prendergast, W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business.
Venue: ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Time: 4 p.m.
For the last couple of decades, there has been a large body of work arguing for the widespread use of pay-for-performance as the appropriate means of aligning the interests of workers with those of their employers. This lecture outlines recent contributions to this body of work, and focuses on a number of general themes. First, the successes of pay-for-performance schemes are limited to a small class of agency settings that do not seem to generalise to other settings. Second, the literature has now begun to consider instruments other than pay as the most natural way to align interests. Finally, there is controversial literature in psychology that now challenges the basic assumptions of this strand of economic literature. The talk will review all these recent contributions, and likely directions for future research.
Canice Prendergast, who was a research assistant at the ESRI from 1983 to 1985, is now one of the world’s foremost researchers on workplace incentives and their impact on productivity. He is currently the W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business.
The Geary lecture is organised each year by the ESRI and honours Dr R. C. Geary (1896 –1983), the first Director of the Institute.
This is one of the special events being held during 2010 to mark the Institute’s fiftieth birthday.
Attendance at the event is free but must be pre-booked. There are a limited number of places available and early booking is encouraged. To book a place, please send details of attendee’s name, organisation and contact telephone number by email to email@example.com.
3. Friday November 26
Canice Prendergast will also give an academic seminar at 1pm on Friday 26 November in the ESRI seminar room.
Contracts and Conflict in Organizations
In many organizations, the way that incentive problems are alleviated is not via contracts, but rather who is hired. This paper offers a theory of targeted hiring, and how its role changes as contracting becomes poorer.
In his recent Richard H. Sabot Lecture, Ken Rogoff addresses the question of whether the IMF is guilty of imposing excessive austerity as part of a bailout. The paper is here. A summary quote:
I will argue that the simplest and perhaps most cutting version of the IMF austerity charges is simply confused. IMF loans typically relieve austerity; they do not make it worse. IMF support helps a country engage in less procyclical budget contraction than it might have been forced to do otherwise. That said, the IMF’s judgments in calibrating programs involve a huge range of subjective decisions about politics, psychology, and economics, judgments that are difficult to get “right” consistently. Toward the end of my remarks, I will argue that in many respects, the greatest problem with IMF programs is not excessive austerity with debtors but excessive generosity toward creditors.
The new issue of The Economist has a long analysis piece on Ireland: you can read it here.
Was it a mistake for the Irish government to use a clever ploy to “park” Nama bonds at the ECB? Was it the non-standard use of the ECB’s temporary liquidity facility as a source of long-term bank sector funding that led the ECB this week to demand an Irish debt restructuring? Or should the ECB have accepted that they needed to provide long-term risk capital to the Irish banking sector in this non-standard way, as part of their role as euro-area lender of last resort?
Patrick Honohan has given an interview to Morning Ireland (audio available here) that provides some more clarity as to what is going on in relation to Ireland borrowing from the IMF and EU.
Update: For those without access to audio, here‘s an almost-accurate transcript from the Guardian’s new Irish business blog (I doubt somehow if Ireland will be borrowing in the form of FDRs. Different kinds of dead presidents are likely to be involved.)
The FT has a very forthright editorial here.
I understand the (party) political reasons which are prompting the government to seek a bailout that will be labelled a bailout for our banks, rather than for the State.
But I have a question. Which do people think the man on the Irish equivalent of the Clapham omnibus (the 46A?) is more likely to accept: An IMF-approved austerity programme whose stated aim is to help the State pay back the largely foreign creditors of Irish banks? Or an IMF-approved austerity programme whose stated aim is to make sure that the State is in a position to keep our schools, health care system and social welfare programmes running?
The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows a continuation of the steady increase in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 4.6% in June to 5.1% in September, in line with the previous increases over the past year.
The next seminar hosted by the Centre for Financial Markets (CFM) will take place tomorrow Thursday November 18 between 2-3pm at the Smurfit School of Business, Carysfort Avenue, UCD. The venue for the paper is Room N304.
The paper is to be given by Cormac O’ Grada (UCD)
Ireland’s Last Big Bank Failure: Any Lessons for Today?
This paper is being presented in association with the Science Foundation Ireland (SFI) Strategic Research Cluster (SRC) in the area of Financial Mathematics and Computation.
the report is here.