This article for the World Financial Review provides a summary and update on the longer paper that I released earlier this year.
Today is the third birthday of Ireland’s blanket guarantee of 6 banks’ assets and liabilities, and 64 billion euros later, let’s take the opportunity to reflect on all that has gone on in Irish public and economic life, to assess how much real change there has been within the institutions that helped bring about the crisis, and perhaps to look a little towards the future. So fire away in the comments.
One small(ish) point though, from something I’m working on with my UL colleague Vincent O’Sullivan. It is true that the late Mr Lenihan did guarantee the banks three years ago. It is not true that that is when State support for these banks began, and we shouldn’t mix the two up. Banks like Anglo were in trouble before that, and to a significant extent. These are not (well not yet anyway) historical curiosa, because we still need to understand and deal with the issues our Emergency Liquidity Assistance (ELA) raises.
To take Anglo, for example: The first mention of ELA which was the supported provided in March 2008 was in the interim accounts for 2009 of Anglo Irish Bank. From note 20, page 46:
“These deposits include €13.5 billion (30 September 2008: €7.6 billion; 31 March 2008: €3.6 billion) borrowed under open market operations from central banks and €10.0 billion (30 September 2008: €0; 31 March 2008: €0) borrowed under a Master Loan Repurchase Agreement (‘MLRA’) with the Central Bank and Financial Services Authority of Ireland. The interest rate on this facility is set by the Central Bank and advised at each rollover, and is currently linked to the European Central Bank marginal lending facility rate.”
In the 2009 annual report the amount lent by the CBI has increased to €11.5 billion. Collateral pledged has fallen to €12.49 billion, implying a much lower haircut of €990 million on €12,490 million, or 7.9%. See (d) on page 91 and Note 37 on page 104.
The 2010 interim report shows the collateral posted by Anglo Irish bank becomes mostly promissory notes issued to that bank by the Irish government and that the ‘MLRA’ agreement has, for the most part been superseded by a ‘special masterloan repurchase agreement (SMRA)’.
For more background information on what happened, Simon Carswell’s book Anglo Republic is excellent and highly recommended, though it doesn’t go into the ELA detail.
Paul Krugman is upset about some pretty fanciful accounts of what supposedly happened during the Great Depression, and I don’t blame him. He also wonders whether economics is a progressive science (I am using the word ‘science’ in its German sense). Well, one of the things that philosophers of science have argued about in the past is whether, when you have a paradigm shift, you end up losing knowledge, and it’s pretty clear what has happened in this instance.
I recently came across this quotation from Mark Blaug’s 1980 book on the methodology of economics which seems worth quoting, given when it was written:
At this point, it is helpful to note what methodological individualism strictly interpreted…would imply for economics. In effect, it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and since few have yet been so reduced, this amounts to saying goodbye to almost the whole of received macroeconomics. There must be something wrong with a methodological principle that has such devastating implications.*
Now, as Krugman points out, this ain’t necessarily so. (See his point 5 in the last of the three links, and see this paper for an example of how you can have all the theoretical bells and whistles these days and still make a sensible argument.) But there is no doubt that a lot of people have been more than happy to say goodbye to the whole of received macroeconomics — for example, I have been reliably informed that a well-known department stopped teaching its undergraduates IS-LM just before the crisis hit in 2008. And the result is that you had people seriously peddling the line that austerity would be expansionary in the wake of the biggest downturn since the 1930s — and these claims were influential in Europe, it seems clear, in the fateful spring and summer of 2010.
One lesson is that it is one thing to play counter-intuitive intellectual parlour games in order to get tenure at a fancy university, but another thing entirely to say something about the real world. For that you need a little common sense.
Another lesson is that economists need at least some training in economic history. No-one with the slightest feeling for historical reality could believe that the Great Depression was due to supply side forces, for example. I observe that Krugman, along with such luminaries as Maurice Obstfeld and Ken Rogoff, did his graduate work in MIT, and I surmise (without having any inside knowledge on the matter) that all three were exposed to Charlie Kindleberger and Peter Temin. They are all distinguished theorists, but also have a historical sensitivity, and this makes them better economists — if your definition of a good economist includes the ability to say sensible things about our very messy real world.
One of the most important things that a bit of history gives you is a sense of the importance of context. A model will work very well in some technological or institutional contexts, but not in others. For example, the Reverend Malthus devised a model that did a pretty decent job of describing the world up to the point that he started writing, but which soon became essentially irrelevant in the century that followed, at least in the richer countries of the world. (He had an economist’s sense of timing.) Sometimes the world is well-described by Keynesian models, and sometimes it is not. And so on.
If the only thing that economic history did was protect us from one-size-fits-all merchants, it would still be worth the price of admission.
*I am looking at the 2nd edition, published in 1992, but I am betting that this sentence dates from the 1980 edition.
There are a lot of reasons why attention has turned to the idea of leveraging EFSF via one of a number of possible methods. If this can be done, it takes a big step towards solving both the solvency and liquidity issues plaguing Euro area sovereigns and banks – on the liquidity front, a €2 trillion or €3 trillion fund is big enough to buy up Spanish and Italian bonds for a number of years, while €440 billion is big enough to absorb a lot of the potential losses.
The financial press are abuzz with various mechanisms that could be used to leverage up the EFSF. However, I was surprised today to twice read that Gros and Meyer’s proposal to have EFSF (or some vehicle funded by EFSF) register as a credit institution and borrow from ECB is likely to be illegal.
The Wall Street Journal reports
Klaus Regling, chief executive of the European Financial Stability Facility, told a podium discussion that “there are serious concerns” that such a scheme wouldn’t be allowed under the EU Treaty, which forbids the ECB from financing governments directly.
And at the FT’s Money Supply blog, Ralph Atkins writes
But Jens Weidmann, Germany’s Bundesbank president and ECB governing council member, has already made clear his opposition. Giving the EFSF access to ECB funding, Mr Weidmann argues, would be “monetary financing” – central bank funding of governments – which is banned under European Union treaties …
More crucially, an ECB legal opinion issued in March made clear that the European Stability Mechanism – a permanent fund expected to replace the temporary EFSF from 2013 – would not be allowed access to its liquidity because of the ban on monetary financing. “The ECB recalls that the monetary financing prohibition…is one of the basic pillars of the legal architecture of economic and monetary union,” its lawyers wrote then. I am not a lawyer, but to me that would also rule out giving the EFSF access.
The ECB legal opinion states
Article 123 TFEU would not allow the ESM to become a counterparty of the Eurosystem under Article 18 of the Statute of the ESCB. On this latter element, the ECB recalls that the monetary financing prohibition in Article 123 TFEU is one of the basic pillars of the legal architecture of EMU
Of course, we in Ireland have been here before. Back in 2009, a number of very serious people assured us that nationalising any banks would be inadvisable because the ECB was prohibited under the monetary financing clause from lending to nationalised banks. (That Anglo were at the time borrowing in a big way from the ECB didn’t seem to get in the way of what seemed like a great argument).
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
This is immediately followed by
2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.
So while the ECB may recall the monetary financing prohibition, you could argue that they don’t recall it very well. One could quibble that EFSF is not currently not a “publicly owned credit institution” but it’s hardly high octane financial engineering to create a vehicle funded by EFSF that counts as such.
The HEA has published its impact analysis of the Programme for Research in Third Level Institutions (h/t Colm Harmon). It is good that government agencies are increasingly open to such evaluation.
From the executive summary, we learn that PRTLI centres and initiatives had a budget of 1.7 bln euro, with 1.2 bln from the Exchequer. 1,700 people were employed, at an exchequer cost of 700,000 euro per job. In 1998, 2,400 full-time academics were employed at the universities and ITs. In 2008, there were 6,200 FTEs.
The commercial impact (a mix of turnover, investment, and cost savings) was 750 million euro, with 1,300 jobs created (or 600,000 euro per job). For the next five years, a further impact of 1.1 bln euro is projected.
In the foreword, John Hennessy (the HEA chairperson) puts on a brave face and lists all the benefits that were not quantified.
Intrigued by the numbers (and their precision; above numbers are rounded) in the executive summary, I read on expecting to find tables and tables with detailed data that would tell me who publishes and who gets cited, which disciplines create economic value, and what universities are motors of development. Unfortunately, such data is not available. The data, by the way, were gathered by questionnaire — that is, companies were asked how many people they additionally employed because of the PRTLI.
Some evaluation is better than no evaluation, but I think that a 1.2 bln euro investment warrants more analysis than what is offered by the HEA.