Fitter Yet Fragile Post author By Philip Lane Post date January 4, 2013 The new issue of the Economist has an article on Ireland here. Categories In Uncategorized 23 Comments on Fitter Yet Fragile ← Growth Forecast Errors and Fiscal Multipliers → 2013 A Pivotal Year for Government’s Economic Strategy 23 replies on “Fitter Yet Fragile” The Economist’s attitude to Ireland has improved markedly over the past decade. Not a single snide putdown in the whole article. “Macroprudential orientation” is entering the public consciousness in Canada as the housing market peaks. They need it, it is common to get 3 or 4 cheqeues from credit card companies offering no interest for six months to the credit card limit which is usually in excess of $20,000. “Over all, the research aims to provide advice on policies that could help to mitigate risks and vulnerabilities among Canadian households, in particular by strengthening the “macroprudential orientation” of Canada’s regulatory system, the presentation says. Macroprudential regulation, a concept that got a lot of buzz during the financial crisis, entails taking steps to protect the entire financial system as distinct from rules that are designed to keep individual banks healthy.” http://www.theglobeandmail.com/report-on-business/economy/bank-of-canada-flags-lenders-role-in-consumer-debt/article6930721/ Things are really bad when the economist starts going easy on you, the cancer is terminal no need to dwell on the more gorey details @ Mickey Hickey Interesting link. Makes you wonder – is banking too important to be left to the private sector? Are private banks doing more harm than good? Economist: ‘That widening shortfall reflects the fact that the Irish people have fared much worse than the Irish economy. National output measured by GDP was 7% smaller in 2011 than in 2007, whereas national income measured by GNP was 11% smaller. This matters not just for living standards but also for Ireland’s fiscal situation: it is GNP that does the heavy lifting on the public finances, since multinational profits are taxed so lightly’ We have a dual economy. http://trueeconomics.blogspot.ie/2013/01/312013-irish-income-par-capita-at-1998.html @ Eureka It may be that private banks are irredeemable. Then again, it may be that the banks are being forced to take on looser lending standards and incremental risks because the Bank of Canada has a base rate of 1.0%, while Canadian GDP is expected to grow at 2.1% in 2012 and nominal GDP is expected to grow by 3.4% (http://business.financialpost.com/2012/10/29/flaherty-cuts-canadas-2013-growth-forecast/). Given the failure of central bank institutions to resist keeping interest rates artificially low (thus forcing banks and investors out the risk curve and blowing asset bubble after asset bubble) and the role that Freddie Mac & Fannie Mae played in inflating the US sub-prime crisis, I think that history deems it likely that even more central planning of financial institutions would do more harm than good. If only banking was left to the private sector, then we wouldn’t be in the mess we’re in today. The accompanying Economist leader on Ireland maintains the positive tone but is disappointingly sloppy on the actual narrative of the last few years (not at all clear on the timeline of the guarantees, the seniors, the prom note). @Eureka @Edward v2.0 Versions of internal industrial and export development banks run or backed by governments have proven to be useful. Time and time again private banks all together like lemmings, jump off the cliff into the lake. Tight regulation is the answer. Something close to an oligopoly is also useful so as they do not cut each others throats. On the other hand if no bank controlled more than 5% of the business it would appear that gov’t could take a laissez faire attitude to regulation. Unfortunately depositor insurance then becomes essential and small banks lobby furiously against it in the hope that they will survive as they eat their weaker brethren. From the gov’ts perspective a tightly regulated oligopoly is the safest option. @ Frank Galton Apart from the sloppiness that you mention, the argument advanced will cut no ice with Germany. The Irish economy is simply too small for any lightening of the country’s debt burden to have any effect, direct or indirect, on the broader developments in the major economies (Germany, France and Italy). As to the “demonstration effect”, there is something in this but the argument cuts both ways i.e. it could equally well be argued that the impact would be negative from the point of view of the creditor countries in possibly causing debtor countries to ease up on their consolidation efforts. The most telling point, however, is that any conceivable changes would not alter the basic Irish budgetary arithmetic, the politically indigestible high jump that both parties in government are doing their level best not to face up to. Both in the case of the FT and the Economist, these considerations must be well recognised. Which raises the question of why both are going to bat so ostentatiously for a country which has not in the past been at the forefront of their concerns? @ All FYI http://www.guardian.co.uk/politics/2013/jan/04/cameron-promises-real-choice-eu It is to be hoped that the view that the other countries take of what is “reasonable” is the same as that of Cameron. Article 48.2 of the Treaty on European Union (Lisbon Treaty) stipulates that “the government of any Member State”, among other parties, may submit to the Council “proposals for the amendment of the Treaties”. And also states “these proposals may, inter alia, serve either to increase or to reduce the competences conferred on the Union in the Treaties”. It does not provide for the return of competences to an individual Member State. If the UK wants a special deal, it will, presumably, have to follow the familiar track of negotiating opt-outs in the context of a wider negotiation on a broader proposal – presumably from another party – to amend the treaties. For the moment, however, apart from the Bundesbank, no such proposal appears to be either desired or envisaged (given the savaging that both the Commission and Van Rompuy proposals received at the most recent European Council). @ Edward v2.0: “If only banking was left to the private sector, then we wouldn’t be in the mess we’re in today.” This ‘mess’ was forecast in 2005. And if you can stretch your imagination a bit, there were warnings issued as far back as 1999. Private sector banking (with a few honourable exceptions) is a chaotic shambles of arrogance, corruption, fraud, incompetence and utter indifference to the plight of the unfortunate waged-labour taxpayers who have been ‘volunteered’ to keep these mis-managed enterprises in virtual solvency. It is NOT a failure of Central Banks. But mind you, we need CBs like we need a hole-in-the-head! It is the abject failure of our legislators (who have all the powers they need) to subject the ps banking to the modest regulations that did exist. They failed!!! And worse their failures continue unchecked. That Economist piece is pathetic pap. ” Europe needs to show that its recipe of austerity and reforms can work. Strong evidence for that would be if a bailed-out country could finance itself again.” As CMcC might say – “What the F*!&” – and as for this bit of crapola: “Underlying competitiveness has improved sharply, judging by unit labour costs.” Sure has. Wages are decreasing and the tax on waged-labour has increased! That’s competitiveness? But there you go again! Its not the ‘unit labour cost’ silly! Its the full economic cost of reproducing the good or service! Who taught these guys? Gather ’round people Wherever you roam And admit that the waters Around you have grown And accept it that soon You’ll be drenched to the bone If your time to you Is worth savin’ Then you better start swimmin’ Or you’ll sink like a stone For the times they are a-changin’ The venerable Sir Samuel Brittan writes in the FT today: “Of a world population approaching 7bn, the US and western Europe together account for a mere 770m. Their gross domestic product per head – a very approximate guide to living standards – is three times the world average. Such discrepancies can hardly be expected to last in an increasingly globalised planet.. The main sufferers are not likely to be ordinary citizens, but the hitherto governing and business classes.” The veteran business journalist Floyd Norris writing in The New York Times said: “The December jobs figures out today indicate that there were 725,000 more jobs in the private sector than at the end of 2008 — and 697,000 fewer government jobs. That works into a private-sector gain of 0.6%, and a government sector decline of 3.1%. In total, the number of people with jobs is up by 28,000, or 0.02%. How does that compare? It is by far the largest four-year decline in government employment since the 1944-48 term. That decline was caused by the end of World War II; this one was caused largely by budget limitations. The only other post-1948 four-year drop was during Ronald Reagan’s first term, when government employment fell 0.6%.” The BLS reported today that of 155,00 jobs added in December, health care employment increased by 45,000 over the month, with gains in ambulatory health care services (+23,000), in hospitals (+12,000), and in nursing and residential care facilities (+10,000). Health care added 338,000 jobs over the past 12 months. @Brian Woods (with a few honourable exceptions) Name one. @ Brian Woods I agree that regulatory failure was a contributory factor in the size and scope of the financial crisis. The comment you highlighted was directed towards market manipulation to achieve political policy goals (e.g. ‘no more boom and bust’ or artificially increasing home-ownership rates) rather than regulatory oversight (ensure banks obey the law including the fiduciary duty obligations of directors) and the two positions are not mutually exclusive. However, banks and bankers are no more greedy, evil or stupid than any other walk of life and they respond to incentives in the same ways. When you describe them in terms of “arrogance, corruption, fraud, incompetence and utter indifference…“ you’re describing the symptoms not the disease – it could just as easily be describing property developers, house flippers in the US, Dot.com kingpins in the 1990s, the south Seas Company, Tulips etc etc etc. In this case the disease was/is central bank mandated artificially-low interest rates under Greenspan in the US and in Ireland it was being tethered to the ECB’s one-size-fits-Germany policy. When banking was based on the 3 6 3 rule it wasn’t thought to be particularly incompetent or corrupt. But when real interest rates are kept artificially low or negative for sustained period, then bankers have no choice but to start lending to businesses they don’t understand and take risks they wouldn’t normally take, in order to make a profit (and keep their jobs). I don’t condone the actions of party-goers who have too much to drink, but if central banks spike the punch then I think they should take the lions share of blame (and to your point, it’s a pity that the chaperone joined the party instead of keeping the peace). The real shame of it is that Bernanke doesn’t even try to pretend that his ZIRP is anything other than a way to force borrowers and savers into taking risks they aren’t that comfortable with and inflating bubbles elsewhere. There would be public outcry in the West if government’s tried to central plan the price of ordinary goods and yet committees of unelected technocrats meet monthly to decide the price of money. Surely the shitty economy has as much to do with current low interest rates as QE? @The Economist A measured article; and well done on highlighting the significance of GDP in the Irish economy and particularly its more realistic measure of national debt. oops GNP of course; and the 200% household debt … @ All Suggestions for Cameron’s speech! http://www.ft.com/intl/cms/s/0/a7d3adae-55b7-11e2-bdd2-00144feab49a.html#axzz2GqU7FfBW @Edward A banks job is to assess risk and lend accordingly. Your assessment tHat they had ‘no choice’ but to lend due to low interest rates is ridiculous . If a bank cannot assess risk appropriately it should no longer be a bank. @ Andrew Two points – firstly, interest rates are a prime driver in assessing risk so when they are distorted then you can’t assess risk properly. Secondly, you need to analyse institutions in terms of human nature and how they actually work (e.g. Chuck Prince from Citi “as long as the music keeps playing we’ve got to get up and dance”) rather than a fantasy about they should work (the same goes for governments). I’m no fan of modern banks (and I’d like to see the largest ones broken up and stringent leverage multiples put in place), but when you have simultaneous problems in bank lending all across Europe, the UK and the US as well as with property developers and investors in the US and around Europe, private equity investors, infrastructure investors, equity investors… all of whose jobs it is to assess risk appropriately… then they can’t all be incompetent. @ Edward “……then they can’t all be incompetent.” Unfortunately they are as shown in this link. http://business.financialpost.com/2013/01/04/how-almost-all-wall-street-got-2012-wrong/ Fact is that with unknown outcomes the path that risks least loss is much less likely to give a bonus than the path promising greatest gain. Finance should be boring @ Eureka That article is a prime example of fitting the evidence to the thesis as there were plenty of people on Wall Street that got it right this year (and a buyer for every seller) – I agree with the broader point on herd behaviour though. I also agree that most of finance, like consumer and commercial banking, should be boring (though if Paulson wants to bet billions of his investors money shorting subprime that’s ok with me). @ OFM: Maybe it will come to me! 😎 There is an Irish-based one which I understand, did not succumb to the lending madness. @ Edward v2.0: Thanks for that thoughtful commentary. Fair point about the disease and the symptoms. The disease is a plague – very infectious! It seems to have been the removal of basic regulatory rules and lax oversight. Now these did not fall out of a Christmas Cracker. Someones had to make the decisions. The US situation is complicated and unique. They control their own currency but have manouvered themselves between a monetary bulldozer and a fiscal cliff. The great partrimony of the US – its massive production capacity has been gifted free (outsourced) and will never return. They are in a severe economic quandry. Plenty of low-paid jobs in services. Folk on low-incomes have difficulty saving, do not invest, do not purchase insurances, do not take on mortgages. They are principally demanders of necessaries. That’s the FIRE economy down the drain – unless! You flood the economy with inexpensive electronic credit – and you avert your gaze and hold your nose when someone mentions that there may be some problems with accumulating debt, monetary inflation and commodity price increases. Its like stretching elastic: eventually it snaps! But what? And when? The US has no foe attacking it on its homeground, but Nature seems to be ‘on-the-job’. The stats are against the US. Its a matter of time (decade or two). God knows what the outcome will be. Europe is a completely different situation: sovereign states! National politics will dictate the outcomes. Some folk assert that the Euro is irreversible and it will all turn out fine. Nothing is irreversible in politics: its politics! We do experience the occassional electoral ‘earthquake’. @ Rich I was in Gorey during the summer. The town seems to have retreated back to a core and abandoned the Tiger fantasies on the outskirts . Loads of unsold houses. I’m sure there are many other towns with similar stories. Comments are closed.