Thanks to Joan Burton for drawing attention to this bill, which was published on Friday. It hasn’t received any media attention as far as I can tell. However, despite its dreary name, it has some important stuff in it. Among other things, it proposes an extension of the bank liability guarantee.
One of the interesting aspects of the evolving public discussion about NAMA is that economists from the stockbroking community have become increasingly explicit about the fact that NAMA will overpay for its assets. The latest example was the column in today’s Sunday Tribune by Oliver Gilvarry of Dolmen Stockbrokers. He suggests that NAMA’s approach to pricing will be as follows:
The haircuts will be determined by what the banks can take without requiring large injections of capital.
Similar predictions have been made in other recent reports by Davys, JP Morgan and others.
Today’s CPI release shows an eye-popping 4.7% year-over-year decline in the headline price index. Most of the decline is due to a 42% year-over-year decline in mortgage interest (which has a weight of 6.7% in the index.) Excluding mortgage interest, the rate of deflation is 1.2 percent.
This brings up an issue which has been an old chestnut among economists of a certain disposition, namely the appropriate treatment of housing costs in a cost-of-living index. My opinion on this (drummed into me years ago while a junior lackey at the Fed) is that mortgage interest rates should not be used to measure the cost of housing and that housing costs are best proxied by matching housing units with equivalent rental properties. This owners-equivalent rent is a major element of the US CPI.
The idea here is that the cost of living index should not depend on the particular financing method that people use to buy homes. If, for instance, we all inherited a large lump sum tomorrow and paid off our mortgages, then the mortgage interest element of the CPI would disappear (once re-based). However, this would not mean that housing had no cost—the decision to pay off the mortgage is a financial one and the money could have been invested in other financial instruments. (For similar reasons, I have also never agreed with people who argue that house prices should be included in cost of living indexes.)
In any case, it’s interesting to note that rents are also well down over the past year, declining 16.4% over the past year (see page 4 of this release). So using this figure in place of the mortgage interest cost would still imply deflation of 2.2%. (Of course, this is a crude calculation since the rental sample is different from the sample of owner-occupied homes and if you were doing all this correctly, you’d probably have different weights.)
One reason this issue matters is in relation to welfare benefits. Those on welfare who don’t own their own home have not experienced a 4.7% decline in their cost of living and this is one reason to be careful in arguing, as many have, that the falling CPI has implied real benefit increases of whatever percent for recipients.
A common pattern when an important economic story comes along is that the media and politicians decide quickly what the issue boils down to and then, even though they’ve got it wrong, this sets the tone for weeks. Recent examples of this phenomenon include the February\March “do we need a bad bank?” debate, which was followed by the equally specious “NAMA versus nationalisation” debate.
Over the last few days, the media and political debate about Anglo Irish Bank has largely focused on the question of whether the bank should be wound down or kept on as a going concern. Those who favour winding down the bank appear to view the funds the government has committed to re-capitalising Anglo as the cost of keeping the bank going and, on that basis, they argue strongly for the wind-down option as being cheaper for the taxpayer.
An example of this line of reasoning is an article in today’s Irish Independent (titled “Taxpayer getting bullied into saving Anglo Irish”) by new Fine Gael TD, George Lee. George puts the case for winding up the bank along these lines:
The problem, of course, is that the people associated with the bank, including the Government, are refusing to bury it … Instead of pumping billions into a failed bank that will never, ever again be profitable, it is much better to wind Anglo down.
I do not think that this is a useful way to characterise the decisions facing the government in relation to Anglo Irish Bank, for a few reasons.