65th Economic Policy Panel

For more than 30 years, Economic Policy has been publishing papers on pressing European policy issues. Preliminary versions of the papers are first discussed at Panel meetings. The 65th Panel meeting, which starts today in Valletta, features papers on the causes of Brexit, on the consequences of Brexit, on the impact of the 2015 reforms on the Italian labour market, on innovation, on entrepreneurship, on retirement, on monetary policy, and on mobile communications. The papers are available here.

Reformed central bank regulators criticised for being, uh, ‘awake at the wheel’

Three people bid for a house, each using a mix of savings and borrowings; the highest bidder wins. Now suppose each had been prepared to spend more, and each bidder’s bank had extended an additional €100,000 of credit. Nothing changes in the aggregate – one house is bought and sold – except that the buyer has an additional €100,000 of debt (and the seller an additional €100,000 of cash.)

How is that a better overall outcome?

When supply is constrained, credit limits are needed (from a central bank, or internally to the banks themselves) to prevent lending driving up house prices and household debt as borrowers compete against one another for a fixed supply of accommodation. Under boom-time conditions, prices rise to levels Ireland saw ten years ago. Any sensible regulator would seek to put a stop to such a spiral, and should expect to receive the support of politicians, the media and a responsible industry.

But the Irish Central Bank’s mortgage lending controls seem to leave it standing almost alone, criticised by the building industry, the banks, politicians and journalists for being – what? – ‘awake at the wheel’? These controls protect buyers from over-paying. Yet the Central Bank is pictured as punishing the consumers it is protecting. (‘Only the rich can now afford housing’ says the newspaper headlines, but without credit limits only the over-indebted could.)

This is remarkable on many counts.

The Crash is not over, but already many seem to have tired of financial regulation. Denounced for failing to act in the boom, the Bank is now denounced for limiting wasteful bidding wars. Meanwhile, largely uncriticised and indeed not much commented on, local authorities construct elaborate and costly planning rules that increase housing costs. That’s without considering what Colm McCarthy calls (in today’s Sunday Indo) the ‘elephant in the room’: the planning and zoning restrictions that create an artificial housing shortage in the first place. Curiously, we criticise regulations that protect us and not the regulations that harm us.

The media present the lending rules as adjustable but house prices as fixed. The opposite should be the goal of policy. If today’s prices and lending limits require a level of savings impossible for most intending house-buyers to achieve, this means house prices are too high not that regulatory rules are too tough. Do we want everything else to be cheap but the most substantial purchase – housing – to be dear? Perhaps we do; Aidan Regan has recently argued on this blog broadly along these lines. When the number of house owners dwarfs the number of marginal buyers, the intergenerational political economy gets very ugly.

To tackle the housing shortage we should leave bank regulators to do their job, and deal with the policy obstacles that cause so few houses to be built. Don’t tackle one problem by creating a second. And don’t fuss over bank regulation to avoid looking at underlying planning, zoning, intergenerational and NIMBY problems.

A scarcity of accommodation is not solved by lending limits. But house prices are lower, mortgages smaller, banks safer, and taxpayers sleep more peacefully; admittedly miscellaneous middlemen may earn lower fees and journalists have to search elsewhere for a story.

Credit limits protect house buyers when there are more buyers than the kinds of houses they want to buy.

Aviation conferences and meetings in November

The 2015 meeting of the European Aviation Conference (EAC) will take place this year in Cranfield University on November 19th and 20th. Academics, business and industry figures will debate whether the momentum behind airline liberalisation over past decades is now spent, as some evidence suggests.

The conference programme may be inspected and a booking made on the conference website.

Preceding the EAC will be the 2nd COST Workshop on Air Transport, Regional Development, Airport Hubs & Connectivity, which will take place at the University of West London (17 November) and Cranfield University (18 November). The program for the Workshop is available on the German Aviation Research Society (GARS) website where, as always, aviation-research-related information is updated continuously; see www.garsonline.de

Garret FitzGerald Lecture and Autumn School

UCD College of Social Sciences and Law will host the Garret FitzGerald Lecture and Autumn School on Monday 19th October, in the UCD Sutherland School of Law. The daytime School (from midday) will focus on the significance of the social sciences. The evening Lecture will be delivered by Professor Cass R Sunstein,Harvard Law School, on the theme ‘Is Behavioural Science Compatible with Democracy?’. More details and bookings here.

Upcoming Conference on Macroprudential Regulation

Call for Papers: Macroprudential regulation: policy dynamics and limitations

A joint academic-practitioner conference with the theme Macroprudential regulation: policy dynamics and limitations will be held in Dublin, Ireland on Friday September 4th, 2015, organized by the Financial Mathematics and Computation Cluster (FMC2), the Department of Economics, Finance & Accounting at Maynooth University and the UCD School of Business at University College Dublin.

Macroprudential regulation is fairly new, and there are many unanswered questions. Can macroprudential constraints on credit be reliably attuned with the business cycle and/or credit cycle? Are fixed constraints on credit safer and more reliable than attempts at dynamic anti-cyclical ones? Should regulators take account of market or regulatory imperfections, such as in the construction sector, in setting constraints on credit growth? Is macroprudential control by an independent central bank consistent with the democratic accountability of government economic and social policies? Potential topics include:
* Business cycles, financial cycles, and the feasibility of dynamic macroprudential control
* The desirability and effectiveness of LTI and LTV limits on mortgage lending
* Democratic accountability and central bank independence
* Modelling house price movements and household debt and their interactions
* Controlling credit growth and credit flows in the Eurozone
* International case studies of macroprudential regulation.
* Assessment of macroprudential credit-restricting policies

Please send papers or detailed proposals by June 15th, 2015 at the latest to Irene.moore@ucd.ie; all papers must be submitted electronically in adobe pdf format. There will be both main conference sessions and poster sessions. We will consider proposed contributions to the poster session until 31st July. The academic coordinators for the conference are Gregory Connor and John Cotter, who can be contacted at Gregory.connor@nuim.ie or John.cotter@ucd.ie.

There are no submission fees or attendance fees for the conference. We are grateful to the Science Foundation of Ireland and the Irish Institute of Bankers for their generous support of this conference. The Financial Mathematics Computation Cluster (FMC2) is a collaboration between University College Dublin, Maynooth University, Dublin City University and industry partners, with support from the Science Foundation of Ireland.

Macroprudential regulation: policy dynamics and constraints

The Irish Central Bank is planning to impose macroprudential risk regulation on the domestic banking sector (see here). The general approach of the Irish Central Bank has been widely welcomed by economists, although the specifics of the proposals are controversial.

John Cotter (UCD) and I are planning a conference in September 2015 on macroprudential regulation, the fifth in our series of FMCC conferences on financial risk and regulation. Macroprudential regulation is fairly new, and there are many unanswered questions. Can macroprudential constraints on credit be reliably attuned with the business cycle and/or credit cycle? Are a-cyclical constraints on credit safer and more reliable than attempts at anti-cyclical ones? Should regulators take account of market imperfections, such as the poor performance of the Irish property development industry and the high costs of new housing construction in Ireland, in setting constraints on credit growth?

Macroprudential regulation has particular importance in Ireland, a small open economy buffeted by credit flows from bigger neighbours. The failure to impose macroprudential regulatory control on the Irish banking sector was a central cause of the Irish financial crisis of 2008-2011. During 2000-2007, within a flawed eurozone currency system, a politically-neutered Irish Central Bank ignored a runaway inflow of foreign credit into the Irish banking system. This massive credit inflow undermined the stability of the Irish financial system and led to the disastrous failure of the Irish domestic banking sector.

There is a varied range of views among economists on macroprudential regulation. This is clear in the responses to the Irish Central Bank’s policy discussion document. Three thoughtful responses come from David Duffy and Kieran McQuinn (both at ESRI) here, Ronan Lyons (TCD) here, and Karl Whelan (UCD) here. (For full disclosure, my own response to the Irish Central Bank discussion document is here.) Lyons recommends fixed, a-cyclical credit controls whereas Duffy and McQuinn argue for dynamic, anti-cyclical controls. Duffy and McQuinn stress the need for more new housing in light of fast Irish demographic growth, and the positive role of high housing prices (aided by bank credit growth) in eliciting an adequate supply response. Lyons argues that excessive bank credit growth should not be used as a hidden subsidy for a cost-inefficient building industry.

Lyons makes a case for no loan-to-income (LTI) constraint, instead relying only upon a loan-to-value (LTV) constraint for macroprudential credit control. This contrasts sharply with the view of Karl Whelan who argues for LTI-only macroprudential controls in the current Irish case. Duffy and McQuinn advocate for both controls. I share the view of Duffy and McQuinn. Lyons does not consider the importance of dual-trigger mortgage default in Ireland (that is, mortgage default which is triggered jointly by income stress and negative equity). The amount of Irish mortgage arrears is likely to remain large and volatile, and this is a key potential source of market instability. Both initial LTI and initial LTV ratios are linked to subsequent mortgage default probabilities, so both should be controlled.

There are certainly many points for discussion, which should make for an interesting conference! A formal Call for Papers will follow shortly – if there are particular themes or panels that we should include, feel free to mention them in the comments thread below.