How will the international community respond to the challenges of a rapidly changing world? Will we see deeper and more sustained cooperation, or a reversion to crude power politics? To answer such questions, it is natural to turn to the international relations literature. I’ve just read Dan Drezner’s little introduction to the subject in one sitting, and if there’s a funnier social science book that has been published in the last couple of decades I’d be interested to hear about it.
One of the most important economics books aimed at wider audiences to emerge in the last few years is Poor Economics by Abhijit Banerjee and Esther Duflo. Banerjee and Duflo are two of the leading economists of their generation and are particularly associated with the use of randomised controlled trials in development economics. However, this book is broader in its scope and tackles a wide range of issues in the economics of poverty, development economics and the economics of the family. The book has ten chapters and two major sections, one dealing with individual behaviour among the poor and the second dealing with the role of institutions. Like the best popular economics works, each chapter deals with very big issues backed with the recent literature but presented in a punchy and readable fashion. It is a cracking read. The first section deals with nutrition, public health interventions, education interventions and fertility. The second section looks at insurance for the poor, microcredit, savings and entrepeneurship. Chapter 10 sets their argument in the overall context of development debates raging between people like Sachs and Easterly.
The book pushes strongly for the continued development of experimental approaches to economic development that attempt to find workable solutions that large-scale philantrophic and government funding initiatives could be aimed toward. It is important reading for anyone working in microeconometrics and development economics broadly defined and also would be great reading for anyone in Ireland working around the area of foreign aid policy. I open up this thread for anyone who wants to debate aspects of the book or the surrounding issues. From an irisheconomy perspective, it is worth thinking about how the ideas in the book might influence how the Irish government directs the overseas aid budget.
The government has revised its macroeconomic and fiscal projections – the updated stability programme is available here.
Daniel Gros spoke at the IIEA on this topic today – presentation is here.
John Bruton writes today on the downside of grievance and the upside of a positive surprise on the deficit-reduction effort: Irish Times article here.
The EU/IMF deals for Greece and Ireland assume some level of market funding for these countries: today’s WSJ carries an article on the problems with this assumption; you can read it here.
The slides from the talk by Klaus Regling at the IIEA yesterday are available here.
Save the Date – Conference Reminder
On Friday May 20th from 4 pm – 7 pm there will be a conference on:
Bank Credit Flows and Eurozone Stability: Theory, Evidence and Policy Implications
at the Institute of Bankers, 1 North Wall Quay, Dublin. The conference is jointly hosted by the Financial Mathematics and Computation Cluster (FMCC) at UCD, the Institute of Bankers, and the Department of Economics, Finance & Accounting at NUI Maynooth. Admission is free. We encourage early enrolment to register a place. We are grateful to the Science Foundation of Ireland for their generous sponsorship via a grant to the FMCC.
What next for Ireland? This column by CEPR President Richard Portes makes the case that the country should restructure its debt.
This article by Martin Walsh in the Irish Times has some convincing analysis (unfortunately the graphics are not shown in the on-line version), and some thought-provoking comments on the Irish government policy conundrum regarding residential house prices. As Martin Walsh notes, to minimize expected future (state-owned) bank losses and Nama losses, policymakers must hope that prices have now fallen to their steady-state equilibrium level. But for the purposes of restoring competitiveness, continued house price decreases would be better.
“… it seems that there is a real dilemma at the heart of national policy. Do we prioritise competitiveness by bringing house prices back into line with incomes or keep them inflated in the hope of reducing further losses to the banks and Nama (National Asset Management Agency), as well as containing the extent of negative equity?”
Most importantly, by most long-term metrics, current house prices in Ireland still seem to be above sustainable levels.
What actions (if any) should Irish policymakers pursue regarding stabilizing the residential housing market, and to what ends?
Due to various absences, the blog will be mostly unattended until next Thursday. Until then, all comments will be held for moderation (some of the accumulated queue might be cleared in the meantime but no promises.)
Writing in today’s Irish Times, Stephen Collins takes the following from the Nyberg report:
It is probably no accident that some of the cheerleaders of the boom have now turned into leading prophets of doom. The same reckless, gambling instinct that fuelled admiration for Seán Fitzpatrick also underpins the “burn the bondholders and damn the consequences” philosophy.
If there is one lesson from Nyberg it is the need for prudent economic management in the years ahead, with careful weight being given to the views of the European Commission and our EU partners.
I think it’s worth echoing Kevin O’Rourke’s previous warning about Mr. Collins and his history lessons. Mr. Collins thinks the lesson we should learn from the crisis is “Don’t be reckless. Be prudent.” However, this isn’t a very useful lesson. I’m sure that Bertie Ahern, Charlie McCreevy and Brian Cowen all believed that their policies were prudent. They were running budget surpluses and their “prudential regulator” told them they had some of the best capitalised banks in the world.
For me, the real message of Nyberg’s report is that Ireland’s economic and political establishment exhibited an extreme form of groupthink during the housing boom. Nyberg’s report brings up groupthink time and again. He describes the phenomenon as follows
Groupthink occurs when people adapt to the beliefs and views of others without real intellectual conviction. A consensus forms without serious consideration of consequences or alternatives, often under overt or imaginary social pressure.
And the report is very clear about the role played by groupthink. For example
The generally held belief in a soft landing outcome, which was quite common even as late as 2008, can also be seen as a consequence of groupthink.
Now let’s take a step back from current economic events and try to ask whether there has been a groupthink element to policy making in the period since the bubble burst. Mr. Collins lashes out at those who wish to “burn the bondholders”. However, these people have had no influence whatsoever on the conduct of economic policy.
Instead, economic policy of recent years has been dictated by the idea that, however difficult things may seem, our situation is “manageable” and that all Irish bank and sovereign debt can and must be paid back.
Those who espouse this vision, including many with weekly opinion columns, backed the September 2008 bank guarantee and also supported whatever incremental measures the government produced as “the final solution” to our banking problems, for example via their backing for the NAMA plan. They have also regularly warned us not to “scare the horses” by suggesting debt burdens might not be manageable.
If anything, it has been this viewpoint, backed by Mr. Collins and many others, that has become the new groupthink. It is not at all impossible to imagine a future Nyberg-style report into the reasons for an Irish sovereign default focusing on the “manageability doctrine” as perhaps the key reason why Ireland failed to avoid default.
What we need now is more respect for dissenting voices, not weekly smackdowns of those who dare to disagree with the prevailing orthodoxy about what constitutes prudent economic management.
Dan O’Brien has an interesting article (and an accompanying news piece) in today’s Irish Times on the “behind-the-scenes” story of Ireland’s bailout. The article is based on interviews for a radio documentary to be aired tomorrow on BBC Radio 4.
I suspect that regular readers of this blog won’t be surprised at the story of how the ECB triggered Ireland’s bailout and then favoured a plan involving a larger upfront fiscal adjustment than the government were comfortable with and a massive and rapid downsizing of the banking sector.
Time will tell whether the ECB’s actions in November helped or hindered the resolution of Ireland’s economic problems. However, the story of November’s events does raise very serious questions about the role the ECB now plays in European politics. Should the key role in this historic decision have been played by an unelected and essentially unaccountable organisation?
The latest issue of The Economic and Social Review is available here.
There is a new IMF working paper on this topic – available here.
Summary: This paper analyzes the interactions between business and financial cycles using an extensive database of over 200 business and 700 financial cycles in 44 countries for the period 1960:1-2007:4. Our results suggest that there are strong linkages between different phases of business and financial cycles. In particular, recessions associated with financial disruption episodes, notably house price busts, tend to be longer and deeper than other recessions. Conversely, recoveries associated with rapid growth in credit and house prices tend to be stronger. These findings emphasize the importance of developments in credit and housing markets for the real economy.
Tyler Cowen writes on the euro in this NYT article.
Donal Palcic and Eoin Reeves from UL have authored a new book on this topic: details here.
The report of the Review Group on State Assets and Liabilities has been published here. While some of the key recommendations had been signalled over recent days in the media there is a lot of detail in the report. Apart from the recommendations on asset disposal there are lots of recommendations on the regulation and governance of state bodies.
The Nyberg Report is available here.
This seems like bad news and hardly the kind of response the government would have been hoping for after its stress test report and recapitalisation commitments. What I don’t know is whether this makes much difference at this point in relation to corporate deposits. Is it the case that the large deposits that were going to be pulled are already gone or is this downgrade going to trigger further withdrawals?
Today’s article by Wolfgang Munchau is a summary of the dinner talk that he gave at last week’s EUI workshop on sovereign default. A very interesting counterpart to Munchau’s article is this paper by veteran sovereign debt lawyer Lee Buchheit (lead negotiator for Iceland! with its creditors) and Mitu Gulati (Duke law professor) which discusses other scenarios for Greek debt. Buchheit and Gulati gave very interesting presentations on this and other relevant topics at the EUI conference (a podcast is due to go up this week and I will pass on the link when it does). It perhaps goes without saying that this paper has a lot of relevance for Ireland.
Wolfgang Münchau outlines one possible scenario in today’s FT: a crisis-driven leap towards eurobonds, in the most toxic political circumstances possible.
Minister Brendan Howlin on RTE’s The Week in Politics has said the government are preparing a “stimulus package that is fiscally neutral”. As a macroeconomist, this strikes me as a pretty strange concept. Pretty much everywhere else in the world, a stimulus package implies a set of measures that cut taxes or raise spending and are not “fiscally neutral.”
Still, one can hardly argue that the current set of tax and spending policies are optimised to generate as much employment as possible, so it may be possible to adjust policies to generate additional employment and I’d be interested in people’s suggestions for fiscally neutral measures that can boost employment. But shouldn’t we stop calling such changes “stimulus packages”?
The Sunday Business Post carries an interesting opinion piece by Paul De Grauwe in today’s paper. Although articles are not available on the paper’s website until the Monday after publication, Cliff Taylor has kindly given us early access to article.
The European Stability Mechanism will not not lead to more stability
After much hesitation and a lot of pressure exerted by financial markets, European leaders finally decided at the end of March to set up a permanent financial support mechanism which was given the name of European Stability Mechanism (ESM). From 2013 on, Eurozone countries will pool financial resources to be disbursed to member-countries in times of crisis. This historic decision illustrates the painful and slow way the Eurozone moves in the direction of more political integration in Europe.
Will the establishment of the ESM shield the Eurozone from future crises? My answer is unambiguous. It will not. In fact it is worse than that. Some of the features that have been introduced in the functioning of the ESM will make it more difficult for a number of countries, in particular Ireland, to attract funds in private markets. These features will have the effect of increasing rather than reducing volatility in the financial markets.
The interview is here.
The Charlemagne column in this week’s Economist returns to the comparison of Iceland and Ireland: you can read it here.