Today’s op-ed column in the Irish Independent by Martina Devlin (or perhaps that should be MarTINA Devlin) is worth commenting on because it’s essentially a one-stop-shop for all the arguments we will be hearing over the next few weeks about the need to pass the NAMA legislation and to do so quickly. The article features a host of misleading arguments.
Page 15 of the draft NAMA legislation tells us that the definition of a “credit facility” includes instruments such as “a hedging or derivative facility.” Section 56, starting on page 46, then defines eligible assets for purchase by NAMA as a range of different types of “credit facilities” as well as “any other class of bank asset the acquisition of which, in the opinion of the Minister, is necessary for the purposes of this Act.”
In theory, this allows NAMA to purchase derivatives from the banks. And indeed, it turns out that they are doing so. Click here to find a tender notice issued yesterday for “a Derivatives Valuation Service Provider to provide valuation services (the “Services”) in respect of derivatives positions which will be transferred to NAMA.”
Part of the work of the service provider will be as follows:
Determine derivatives’ valuations based on market-accepted methodologies and market rates. Valuations will incorporate adjustments which will be based on the creditworthiness of the derivatives’ counterparties and which will be specified in guidelines agreed by NAMA with the service provider.
Colm McCarthy’s suggestion that an inquiry into what went wrong is gaining some level of support in political circles. While there is plenty of material to digest in terms of what went wrong locally, there is also a lot of interest in understanding what went wrong in the international financial system. Part of the debate concerns the role of economists, especially in terms of forecasting such crises.
A reader recommends this blog post which is critical of mainstream macroeconomic models. Of course, Willem Buiter of the LSE issued a notorious critique a while back.
More recently, a group associated with the British Academy wrote a letter to the Queen to answer her question to Luis Garicano of the LSE as to “if these things are so large, how come everyone missed it?”, while Robert Lucas defended mainstream macroeconomics in the Economist magazine in this article.
An important dimension of this debate is the relative roles of economists in policy organisations, the financial sector and academia in assessing the risks of a crisis and speaking out on these risks. While some of the debate has focused on the role of academic economists, it is maybe more difficult to evaluate from the outside the performance of economists in policy organisations in providing risk assessment, since their advice is often confidential. In this regard, the external evaluations of the performance of the IMF in previous international crises sets an interesting precedent, with the Independent Evaluation Office now playing this role on a regular basis.
In relation to Ireland, the testimony of Kevin Cardiff of the Department of Finance at a recent Oireachtas Committee hearing is quite interesting in explaining the evolution of the thinking of the Department in the run up to the crisis. You can read the transcript here.
The IMF has established a new blog: the link is here. The most recent entry is about the measurement of potential output and the adverse impact of financial crises on the level of potential output – interesting reading.
Today’s Sunday Business Post carries two interesting opinion pieces. Alan Ahearne writes a defence of the NAMA approach (you can read it here), while Colm McCarthy recommends an inquiry into the banking crisis (you can read it here). The latter suggestion has been adopted elsewhere (for example, in Iceland).