Thinking Short Post author By Seamus Coffey Post date November 5, 2012 John Bradley has an essay in the latest edition of the Dublin Review of Books. Categories In Uncategorized 36 Comments on Thinking Short ← Deconstruction → What Caused the Eurozone Crisis, & Does it Matter? 36 replies on “Thinking Short” Brilliant! Notably. “Although Lewis is very effective in debunking the myth that we should put our faith in bankers, he seldom talks about the rest of the economy: the “real” economy. It is important that public discourse in Ireland turn from an obsession with the “financial” economy to consider what has to be done to restore the health of the real one. Popular media will always chase after drama and suspense: midnight meetings of EU finance ministers as Greece totters on the brink of collapse; rows in the council of ministers as the rich EU states gang up on the spendthrift “deadbeats”, to use Lewis’s term; revelations about who did what on the night the Irish bank guarantee was agreed, etc. Unusually in Europe, Ireland lacks media that deal systematically with business, economic and financial affairs. We seldom think aloud or in depth about the manner in which our economy functions. Such issues tend to be highlighted only when there is crisis or scandal. Even research organisations like the ESRI have tended to fall silent in recent years on the controversies that have engulfed the economy and prefer to deal internally within government circles rather than externally by informing the wider public who are ultimately paying for the whole fiasco. The Fiscal Advisory Council, whose secretariat is based at the ESRI, is permitted to call for deeper cuts and higher taxes without feeling the need to examine in any depth the likely consequences for employment and the operation of the real economy.” ‘What does the future hold? Between 1985 and 2000, Irish GDP per head grew from 67 per cent of the EU average to 115 per cent. No economist, including myself, predicted such a dramatic turnaround. But with hindsight we now recognise that success came not overnight, but as a result of decades of strategic policy decisions in the areas of education, training, improved infrastructure, policy stability and transparency in corporate taxation and a willingness of households to carry a correspondingly higher tax burden. Many of the gains of these years have now been dissipated both in terms of lower current income and higher national debt. However, the underlying Irish development strategy is as sound today as it was at the height of the 1990s “real” Tiger period, even if it needs modification and updating’ A readable and in many respects uncontentious article, but where is the evidence that our development strategy is ‘sound’. Michael Hennigan demonstrates daily that our FDI wheeze has turned into a cul de sac, and our domestic economy is in thrall to foreign and local vested interests. The author himself acknowledges that the austerity strategy cannot deliver growth. Can someone more knowledgable elaborate on this: “Research shows that it was the differing performances of the internationally traded and the non-traded sectors that largely dictated the sustainability of the former (“real” Celtic Tiger) period of sustainable, strong growth and convergence to EU average standards of living, but the unsustainability of the latter (“faux” Celtic Tiger) period that was characterised by a bubble economy based on property speculation fuelled by excessive credit creation.” Why did it move from being sustainability dicatated by the ‘internationally traded and the non-traded sectors’, to the bubble economy of the naughties? Was it mostly the Euro? That ‘was it the euro’ is pretty loaded and against the gist of the article, so put another way, was there a change in regulatory policy in the naughties, if not then why did the economy only become skewed towards the financial sector/property bubble at that time? As I see it the healthy well grounded economic growth that took place after we entered the EU laid the ground for the speculation that followed. Years of healthy growth led to overconfidence as low unemployment and rising incomes became firmly entrenched. The prevailing mood then became one where businesses could not fail and nobody could lose their job. The Gov’t’s revenue exploded as the property market ramped up. The Gov’t could not spend money fast enough which stoked the property market and led to rising wages and inputs for productive businesses. In the end we priced ourselves out of manufacturing and service jobs which knocked the legs out from under the property market. There are plenty of people who can be blamed, we should be confining our ire to the people who were paid to act responsibly. A short list would include ICB, Banking Regulator, DoF, TDs’ and Ministers as well as the domestic banks and the foreign who provided our banks with the funds that were used recklessly. The nub of the matter now is how can we help the people who were suckered into buying grossly inflated residences that are now under water and at risk of foreclosure. Those are the people we should be helping first and not mega banks all over Europe and North America. The idiotic proposal that properties valued up to 3 million can be salvaged is way beyond what our near bankrupt Gov’t is capable of accomplishing.The owner occupied residences when being foreclosed and auctioned must have a proviso that the bankrupt owner has the right of first refusal at the auction price. No bulking of properties auctioned can be allowed. The self serving nonsense coming out of the Dail and the oligarchs has to end. Paul Quigley is correct to question the argument that the “underlying Irish development strategy is as sound today as it was at the height of the 1990s ‘real’ Tiger period.” The indigenous tradeable goods and services sectors have been operating below par for decades and the dream of a knowledge economy was to increase the likelihood of winning significant science-intensive FDI projects while also engineering significant innovation in the indigenous sector. Neither has happened. Dubbing a call centre a ‘centre of excellence’ isn’t a strategy. The gullible politicians have allowed the universities to hijack the strategy and the results are dismal. FDI peaked towards the end of the 1990s coincident with the launch of the euro and the dot.com crash, which slowed the high tech sector. There were also 2 parallel developments: McCreevey’s extensive property tax incentives, halving of capital gains tax and big cuts in income tax. while from 1999, US companies began to implement aggressive tax strategies to divert profits to low tax or no tax havens. While the Irish high tech sector slowed, the profits of US multinationals in Ireland doubled between 1999 and 2002. The development of services gave further opportunities to mask the true picture. For each dollar of profit taken in Luxembourg in 1999, US corporations took $4.56 of profit in 2002. The result for Bermuda was $2.96; for Ireland $2.01; and for Singapore $1.72. For the UK, each dollar of profit taken in 1999 was equal to 67 cents in 2002; for Germany, it was 46 cents. Unusually in Europe, Ireland lacks media that deal systematically with business, economic and financial affairs. We seldom think aloud or in depth about the manner in which our economy functions. Such issues tend to be highlighted only when there is crisis or scandal. This allied with the addiction to spin at policy level, is a toxic combination. In the past week, the Irish Times has had an editorial on research funding and 2 articles by Dick Ahlstrom, the science editor, quoting professors on the potential impact of reduced public spending on basic research. Hard science but no hard facts. Last August, there was no press release from Bruton’s DJEI on the Irish Patents Office’s annual report. Irish patent applications in 2011 were at a 30-year low. Finfacts was the only media outlet to report the news at the time. I gave some facts such as this and others to Ahlstrom, after the DEW conference; was he interested? I don’t know! Just a few weeks ago, the National Digital Research Centre held a public debate on innovation policy. A panel of 15 comprised mainly insiders: 6 academics; 4 public sector staff; 1 lawyer from a Dublin law firm; 1 venture capitalist; 1 author; the head of the Irish Internet Association and Deputy Eoghan Murphy. In 2010, the 28-strong insider dominated Innovation Taskforce produced a report that was possibly the most ridiculous official report in the history of the State. Innovation Ireland: Groupthink and vested interests pervade the ecosystem http://www.finfacts.ie/irishfinancenews/article_1025088.shtml @RF “Why did it move from being sustainability dicatated by the ‘internationally traded and the non-traded sectors’, to the bubble economy of the naughties? Was it mostly the Euro?” Ever hear of a Mr C McCreevy and fellow travellers. @THE 99%; ReTraining Economists; & in memory of PD_FF_ers The central theoretical tenet of market liberalism is the efficient (financial) markets hypothesis. In the strong form that is most relevant to policy decisions, the hypothesis states that the prices determined in markets for financial assets such as shares, bonds and their various derivatives are the best possible estimates of the value of those assets. In the core ideology of market liberalism, the efficient markets hypothesis is combined with the claim that the best way to achieve prosperity for all is to let the rich get richer. This claim is rarely spelt out explicitly by its advocates, so it is best known by its derisive label, the ‘trickle down’ hypothesis. Taken together, the efficient markets hypothesis and the trickle down hypothesis lead us in the opposite direction to the one envisaged by Keynes. If these hypotheses are true, the mega-fortunes piled up in speculative financial markets are not merely justified: they are essential to achieve and maintain decent living standards for the rest of us. The investments that generate technological progress will, on this view, only be made if they are guided by financial markets driven by the desire to make unimaginable fortunes. As long as market liberalism rules, there is no reason to expect progress towards a less money-driven society. The global financial crisis and the subsequent long recession have fatally discredited its ideas. Nevertheless, the reflexes and assumptions developed under market liberalism continue to dominate the thinking of politicians and opinion leaders. In my book, Zombie Economics (2010), I describe how these dead, or rather undead, ideas have risen from their graves to do yet more damage. In particular, after a resurgence of interest in Keynes’s macroeconomic theory, the entrenched interests and ideas of the era of market liberalism have regained control, pushing disastrous policies of ‘austerity’ and yet more structural ‘reform’ on free-market lines. Social democratic parties have failed to put up any serious resistance so far. Popular anger at the crisis has been channelled into right-wing tribalist movements such as the Tea Party in the US and Golden Dawn in Greece. http://www.aeonmagazine.com/living-together/john-quiggin-keynesian-utopiav1/ At least Aer Lingus is doing well http://www.irishtimes.com/newspaper/breaking/2012/1106/breaking16.html A total of 962,000 million passengers flew with Aer Lingus and Aer Lingus Regional last month, a 0.9 per cent rise on October 2011 @DoD “The central theoretical tenet of market liberalism is the efficient (financial) markets hypothesis.” The twins “risk on” and “risk off” represent the tragedy of a beautiful hypothesis destroyed by ugly facts @seafóid The idology of the 1% has done untold damage – yet its adherents are now the crew leading the so called recovery! How do I scream on a blog? And not only here – it has destroyed, and is destroying, the great American Dream …. regardless of the results tonight … Angela is following suit …. and the Chinese Communist Party is installing its new leadership … ironic …. the communists may yet win the game of ‘capitalism’ – what would poor oul Marx make of it all were he to return today and comment? ‘Germans see the US election as a battle between the good Obama and the evil Romney. But this is a mistake. Regardless of who wins the election on Tuesday, total capitalism is America’s true ruler, and it has the power to destroy the country.’ http://www.spiegel.de/international/world/commentary-total-capitalism-and-the-downfall-of-america-a-865437.html @ DO’D: Your third para reads as if written by Veblen (a tad previous to Keynes!). If you ‘extract’ the surplus profit from your productive industry and invest in financial casinos, and keep re-investing in these Ponzi-style endeavours – eventually you encounter a bad bust (excessive debt v inadequate income). This is not news – it might have been in 1800. Keynes was only as good as the bust he encountered. His prescriptions cannot be applied to our bust: they are unworkable. Our present bust is a mite different (in both nature and magnitude). You would have to go back to Sumerian and Babylonian times to see how they resolved their financial predicaments. Ours is that intractable! “Men of affairs venture sometimes on acts that the common judgement of the world would pronounce absurd …” [Joseph Conrad: Nostromo] @All The article as a whole is largely uncontestible in what it sets out to say however there are some points which I believe the author has stretched the ‘truth’ perhaps a bit too far in order to force home his overall argument. Reference to a spat between Baroso and Joe Higgins in the European Parliament: Ireland needed a wake-up call, and it came when a justifiably exasperated José Manuel Barroso, president of the European Commission, rounded on the Irish MEP Joe Higgins and told the brutal truth: To the distinguished member of this Parliament who comes from Ireland, who asked a question suggesting that the problems of Ireland were created by Europe, let me tell you: the problems of Ireland were created by the irresponsible financial behaviour of some Irish institutions, and by the lack of supervision in the Irish market. My recollection of the debate was that Joe Higgins was pointing out the fact that it was German and French banks who had lent money to the Irish banks in the first instance , and lost it as a result, but the EU/ECB decided that it made perfect sense to repay the lenders in full and send the bill to the Irish taxpayers. This is what Joe Higgins was arguing with Baroso at the time i.e. the ‘solution’ was a brainless one and the losses should have been borne by the initial lenders and not the Irish taxpayers. Baroso did indeed have hissy fit about being told the actual position. The article suggests that the real truth was in fact that the Irish CBI et al allowed this situation to develop and therefore have only themseleves to blame. This may indeed be true but this is not a basis on which to share economic losses deriving from dire lending decisions – losses should only ever fall on the side of those who took risks with their capital. Joe Higgins was right, the normal Joe (pardoning pun) were and sadly still are being asked to bear this dire lending losses burden, the author misses this rather important fact. fyi The European Central Bank has launched an internal investigation into whether it broke its own rules and lent money to Spanish banks on terms far more generous than those offered to Irish banks. The ECB inquiry relates to the collateral received in exchange for nearly €17 billion worth of loans. Spanish banks are reported to have offered collateral that the ECB accepted as being more credit-worthy than it actually was and so offered the Spanish banks a preferential discount – effectively a cheaper loan. An ECB spokeswoman confirmed the collateral examination following a report in German newspaper Welt am Sonntag yesterday, which revealed the Spanish banks should have received the same discount as Irish banks. The newspaper said that if they had been, the affected banks could have had to produce up to €16.6bn more in collateral. http://www.macrobusiness.com.au/2012/11/europes-extremism-gambit/ @ Yields, etc. Hello all. Yes, and the article blames the CBI for its muted warnings. But at that point the CBI was no longer a proper Central Bank, so it wasn’t able to issue warnings by raising interest rates. @Gavin Kostick Welcome back to hell. Nothing learned, nothing forgotten. Link to excellent summary of PIGS economic performance. http://www3.eeg.uminho.pt/economia/nipe/goinggreek/. Shows how Ireland still has the worst deficit and primary deficit position. We really need to make progress on spending cuts and tax increases fast if we are to get back to the markets. @ D O’D Are you claiming to be John Quiggin? @David O’Donnell re ECB ‘investigation’ “An ECB spokeswoman confirmed the collateral examination following a report in German newspaper Welt am Sonntag yesterday, which revealed the Spanish banks should have received the same discount as Irish banks.” We all need to think about that statement. Does AIB get the same interest rate as BOI or PTSB? Does Santander get the same interest rate as ‘Banco Muerto’? I would have though that collateral was assessed by bank and not by country. By putting all the banks in each country into the same collateral pot, if that is what the ECB is doing, means that the ECB is rating the country rather than the banks. Instead of breaking the link between bank and sovereign, the ECB is in fact institutionalizing that link. One has to wonder whether such ‘national categorising’ is within the remit of the ECB. Not that being outside of their remit has bothered them in the past. @Yields ” The article suggests that the real truth was in fact that the Irish CBI et al allowed this situation to develop and therefore have only themseleves to blame. This may indeed be true but this is not a basis on which to share economic losses deriving from dire lending decisions – losses should only ever fall on the side of those who took risks with their capital.” +1 @Joseph Ryan Strange. Key hold-up on any Irish ‘banking deal’ is the German fear of creating a precedent for a potentially much larger Spanish bust before the Sept 2013 elections which migh damage Angela’s reelection chances. Meanwhile the rest of the EZ is supposed to sit quietly in austere silence and obedience for another year or so to 2014 ….. Wish the ECB would simply print a few trillion, sort out a few sovereigns, and bankrupt a good few banks just for the sheer pleasure of it! We will hear more on this one ………. @Simpleton NO. Poor editing on my part and should have used parentheses. Added the link which has a Quiggin signature – and text – as Quiggin fits well with Bradley’s focus on Lewis … [I’m also rabidly, and unashamedly anti EMH …. and Quiggin does a lovely synthesis here which my generous nature demands sharing ….. @John Quiggin Keep up the work. @ Tom Paine A very useful link! Insofar as I could follow the Holland/Portes/McHale debate, it seemed to boil down not so much to a question of the need for budgetary adjustment as of the timing and pace of such an adjustment. It raises the interesting question, in my mind at least, that, in having the worst figures in this area may, largely by accident, be a reflection of the right policy having been followed (at least up to this point). The other charts demonstrate the “special” nature of the Irish situation in relation to economic and export performance and, of course, the size of the country’s banking bust. @ All I qualified the essay as “brilliant” which IMHO it is. But that does not mean an endorsement of everything it contains. The FAC, for example, can only carry out the remit that it is given. A distinction has also to be drawn between the media looking for sensation in an EU context and the need to keep up with what is going on. http://www.euractiv.com/euro-finance/budget-summit-confessionals-news-515853?utm_source=EurActiv%20Newsletter&utm_campaign=ff4f20f0d9-newsletter_daily_update&utm_medium=email A failure to agree on 22 November will have an impact out of all proportion to the sums involved. The capacity of EU leaders to disappoint is, however, it would seem, one of the fixtures of the current crisis. @Joseph Ryan A bank’s maximum rating is capped at its sovereign’s rating. Like a parasite, they are only strong while their host is strong. A fundamental misunderstanding of this contributed to the foolishness of the guarantee. Morgan Kelly appears to be one of the few that understood this – contingent sovereign liabilities = sovereign downgrade. Sovereign downgrade = doom for the guarantee. Not that the gigantic bluff that was the guarantee was ever going to succeed, but it was not required that the sovereign be taken down with the banks and the poor state of the sovereign will limit the ability of the domestic banks to recover their ratings or for any new banks to start. @ JR collateral is rated on the basis of the issuer, ie Ireland for Irish tbills, Spain for Spanish tbills etc, regardless of who is actually presenting them to the ECB refi window. However, obviously in a lot of these situations of late, a country’s bank’s are the main buyers of its debt, so its Spanish banks predominantly hitting the ECB with Spanish tbills. Interestingly, Irish banks only hold a scant amount of Irish tbills, so its other banks holding them that ‘suffered’ from this ruling, though it would also impact on the desirability of banks anywhere, home or abroad, to hold Irish govt tbills. @BEB Thanks for clarification which is a lot clearer than Welt Am Sonntag or the ECB spokesperson made it. So if you are a bank that may need access to the ECB window, hold only AAA rated country bills (and bonds?). No wonder we have large bond spreads. But as the ECB and others declare that there cannot be a sovereign default, why then do they discount bills to reflect a risk element. Lex on Irish Banks http://www.ft.com/intl/cms/s/3/d22aa1f0-2431-11e2-9509-00144feabdc0.html 44% bad loans the worst in recorded major banking crisis history. Well done everyone at AIB and BoI. And Lex wants the Govt guarantee to lapse. Any takers? @Seafoid The pressure to get rid of the bank guarantee costs is now coming from all ‘official’ quarters. The Troika want it gone, the banks want it gone, and now Lex wants it gone. The reason? They all want to save the banks the money that the State now gets from them. But the banks now know the State will guarantee them anyway even if the State goes bust (more bust) in the process of so doing. So what the banks really want is a guarantee that does not cost them anything. It is that simple. Lex wants Ireland banks ‘investable’ again. That would be nice. But will the investors take the banks with a €64 billion liability attached? Because that is the only way ‘investors’ should get to take the banks. If investors are unwilling to do that, then the State can continue to charge the guarantee until the €64 billion is paid back. It will probably take about the same time as the PN note. Come to think of it, that should be the ‘deal’ The Guarantee for the PN notes. Take it or leave it. @JR “But as the ECB and others declare that there cannot be a sovereign default, why then do they discount bills to reflect a risk element.” I’ll take it as a question… It is indeed the great mystery of our time. By discounting bills, the ECB reduces their attractiveness which increases their yield which indicates pressure on the sovereign which results in rating agencies downgrades which leads the ECB to discount the bills to reflect an increased risk element… There’s nothing particularly complex about this chain of logic. Each actor is behaving perfectly rationally in the single transaction they are performing. None of them are looking beyond that, bar hand-wringing. Really the only CBs that have stepped outside this are the Fed and the BoE. Both have figured out that the ratings agencies, far from leading the bond market, follow it. So if yields are kept low through QE, the risk of a downgrade is effectively defanged. I believe it’s called ‘playing the game’. @Hogan Circular logic or perhaps vortex logic! As you may have detected I find the giving the banks to the private sector, debt free, to be very objectionable. Just as bad as taking on their debts to begin with. As a country we do not seem to be willing or able to stand up ourselves. The financial sector and their interests seem to have taken over completely and their interests are aligned perfectly with those of the ECB, despite all appearances to the contrary. Ref; The recent Noonan statement that he is powerless to tackle banker’s pay and perks is just appalling. If that is all the fight he has left in him, he should go home. He has no business is being a Minister for Finance. If he won’t tackle the pay and perks of bankers in banks that we own, there is zero possibility that he will fight the Europeans to retain the guarantee income for the State. The Macbeth rallying cry of; “Ring the alarum-bell! Blow, wind! come, wrack! At least we’ll die with harness on our back” is unlikely to be uttered by anyone in this government. Not only have we sold out the next generation but we keep selling them out, every day. @ hoganmayhew Maybe “gaming the system”! @ JR ‘Ref; The recent Noonan statement that he is powerless to tackle banker’s pay and perks is just appalling. If that is all the fight he has left in him, he should go home. He has no business is being a Minister for Finance’ When a person in authority says that something is ‘illegal’, I tend to assume that this is code for ‘cannot safely be addressed, that is to say, it cannot be addressed without uncovering issues which are liable to emabrrass some other pillar of society. The real beauty of the banker mega-pensions is that they are the reward for having caught authority with its pants down. Safe as houses mate. @Seafoid “But the killer is the government’s guarantee scheme: it wiped out four-fifths of first-half pre-provision profit at Bank of Ireland, whose short-term deposit rating is the same as the sovereign’s. Banks must be weaned off it soon – Dublin should let it lapse in December. That would be a sign of normalisation for taxpayers and sovereign alike. Ireland must make its banks investable again.” With 44% of loans bad, who in their right mind would want to “invest” their deposits with these banks without a government guarantee? And what happened to all that 1% money the ECB lent to all and sundry for up to three years? Something smells. @ FLJ It looks weird, doesn’t it? The banks need the guarantee but they can’t make any money without it. I suppose that is the definition of a zombie bank but then why would anyone want to invest ? @ JR “The recent Noonan statement that he is powerless to tackle banker’s pay and perks is just appalling” I see now that Mr. Sheehy has agreed to a reduction. Maybe Noonan was being political and his words actually meant “slash your pension but do it yourself”. This banking perks thing is interesting. Banks are not making money. Last Jan the FT was full of bankers explaining how bonuses were sacrosanct but now that the hatchet is out in the City it will be interesting to see if the tune changes going forward. Comments are closed.