With flooding back in the news today, I thought I’d take the opportunity to mention that my colleague and co-author Swenja Surminski from LSE will be giving evidence tomorrow morning (Thursday) at the Oireachtas Finance Committee hearings on the Flood Insurance Bill. Details of the session are here. You should be able to watch proceedings online here. The Flood Insurance Bill can be viewed here.
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.
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.
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.
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
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.
The conference on macroprudential regulation originally scheduled for September 4th has been postponed to Friday, January 29th, 2016. See here for all details on the conference. A full programme will be provided closer to the date.
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.email@example.com; 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.firstname.lastname@example.org or John.email@example.com.
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.
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.
The Irish Central Bank is scheduled to introduce new macro-prudential risk controls on Irish mortgage lending, with the new regulations taking effect on January 1st or soon thereafter. One of the regulations will limit most new mortgages to an initial loan-to-value ratio of 80% or less. There has been considerable discussion of the effect of loan-to-value limits on potential property purchasers, but the analysis has been very poorly framed.
The budgeting scenario has been described as follows:
“Consider a couple who wish to purchase a €300,000 property. With a LTV limit of 80% this will require that they save €60,000 for the down payment whereas if they were allowed to borrow 85% they would only need savings of €45,000.”
This oft-repeated budgeting scenario misrepresents the nature of market-wide LTV limits imposed by the Central Bank. This budgeting scenario gives the impression that the policy decision is about imposing/not imposing the LTV constraint on only one particular buyer rather than market-wide. It misses the large compositional effects since leveraged property buyers compete with one another for properties. The degree of leverage allowed in the banking system feeds into property prices, and this affects the opportunity set of purchasers. Continue reading “Composition Effects and Loan-to-Value Limits”
The Irish Central Bank discussion paper on macro-prudential policy tools published yesterday seems to be a trial balloon for possible caps on Loan-to-Income (LTI) and Loan-to-Value (LTV) ratios for new residential property mortgages in Ireland. The general theory behind imposing these limits is laid out clearly in that document; there is no reason to repeat it here. I want to discuss some notable features of the Irish environment which strengthen the case for these caps (but do not make the decision easy).
The details for the calibration of the EU-wide bank stress test are now available. Looking only at Ireland, and only at one of the key variables in the stress test, the calibration looks problematic. It may be coincidental that the Irish adverse scenario has been badly chosen; it might be that all the other member countries have reasonable calibrations. If the others are as problematic as in the Irish case, this is not a reliable EU banking sector stress test.
Under the adverse scenario, Irish property prices are assumed to suffer a cumulative three-year drop of 3.03%; equivalent to a decline of 1.02% each year for three years in a row. Over the period covered by CSO data, 2005-2013, Irish residential property prices had an annual sample volatility of 11.7%. This in turn implies (under reasonable assumptions) a three-year volatility of 20.27%. In risk analysis it is conventional analytical shorthand to measure adverse outcomes in “x-sigma” units defined as the outcome as a multiple of the standard deviation. For an adverse scenario calibration, the assumed outcome is usually roughly a two-sigma or three-sigma event. Using a four-sigma shock would not be unusual (due to fat tails in some probability distributions). The EBA has calibrated the adverse price shock as a 0.1492-sigma event. That is not credible as an adverse scenario in a stress test.
Keep in mind that the stress test is meant to reassure market participants that even in an adverse scenario the Irish banks are sound. This test reassures us that if property prices fall by as much as one percent a year over the next three years, the banks have enough capital. In the case of a two-percent fall, there are no promises.
As a caveat, this does not mean that the Irish banks need equity capital. They have already had a credible stress test (in 2011) and a big capital injection. Also, the Irish property market although very volatile has a maximum likelihood price change which is positive over the next three years. However the asset class also has considerable “downside” potential and continued high volatility. Conventionally, at least in the case of portfolio risk analysis, the unconditional mean of a stressed variable is set equal to zero for risk analysis purposes. The EBA has chosen to build in a big positive benchmark price rise for Irish property assets, and this is part of the reason that the adverse scenario is unacceptably mild. In any case, this calibration is extremely mild as an adverse scenario and not reassuring for the EU-wide test.
16th April 2014: Sean FitzPatrick has been found not guilty of all charges relating to the Maple 10 transaction. First the judge (for some of the charges) and then the jury (for the remaining charges) examined the evidence carefully, and declared him not guilty. The Maple 10 scheme was truly outrageous, but there is no reason to second-guess the verdicts as given.
From a broader perspective, these not-guilty verdicts might encourage a deeper understanding and better public response to the Irish credit bubble and financial collapse. It is a myth that Sean FitzPatrick caused the Irish financial collapse. Sean FitzPatrick was a major character in the Irish credit bubble, but not a fundamental cause. The collapse is better explained by the extremely “light-touch” financial regulatory system which was deliberately chosen by the democratically elected government of the Irish state, and to a lesser degree by the deeply-flawed Euro currency system chosen by member states. Over the short term, the Irish public benefitted handsomely from both the flawed Euro currency system and the very flawed light-touch Irish financial regulatory system. The Irish electorate was keenly enthusiastic for both.
The Maple Ten scheme was an outrageous transaction whose sole purpose was to unwind another outrageous transaction – the accumulation of a disguised 29% ownership of Anglo Irish Bank by Sean Quinn using contracts for difference (CFD). CFD’s are only legal in some countries, are a naturally toxic trading vehicle, and evade corporate governance rules by disguising true share ownership. Ireland during the boom was a world leader in the use of CFD’s, and Sean Quinn’s disguised 29% ownership position using CFD’s was particularly outrageous. The Irish financial regulator was simultaneously monitoring (or not monitoring) two very large and very dubious financial transactions in a relatively tiny domestic financial system. To lose track of one large, dubious financial scandal may be regarded as a misfortune, to lose track of two looks like carelessness.
During the bubble period macro-prudential risk regulation by the Irish Central Bank was also (with hindsight) very poor.
The fundamental causes of the Irish financial collapse were two flawed systems – a flawed Euro monetary system and a very flawed Irish financial regulatory system. Both of these systems were built up in broad view and with enthusiastic public support.
– – – – – – – – – – – – – – – – – –
See Corbet and Twomey for a technical treatment and empirical study of CFDs, with a focus on Irish CFDs.
This year’s European Aviation Conference takes place at the University of St Gallen, Switzerland on 14 and 15 November. Programme, speakers, booking details and venue are at www.eac-conference.com.
Feedback after last year’s event indicated a greater preference for active debate, so almost the entire first day this year is devoted to a moderated discussion between ten invited advocates and critics of airport price regulation. And the 2013 Martin Kunz Memorial Lecture is to be given by the person credited with devising modern price cap regulation, Professor Stephen Littlechild.
HAC 2013 is preceded on Wednesday 13 November by a workshop of the German aviation research society (GARS); the call for papers is here: www.garsonline.de.
Unsated wonks can devote the entire week to aviation policy; IATA holds a two-day discussion on evaluating the economic effects of air transport on Monday and Tuesday 11-12 November in Geneva. Details on the GARS website given above.
My colleague Tom Flavin and I are preparing a paper for the Dublin Economic Workshop on the financial characteristics of Irish Mortgage defaults. The analysis relies on a donation of anonymized data on mortgage arrears from Permanent TSB and we are grateful to them for their assistance. Tom will give a fuller account of our data analysis at the conference; this blog entry highlights some of the strong evidence for a very substantial proportion of strategic arrears in Irish mortgage arrears. Continue reading “Strategic Irish Mortgage Arrears: The Smoking Gun”
Fiona Muldoon, Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, gave a speech yesterday in Glenties at the MacGill summer school (h/t John Gallaher). The topic of the speech was “Restoring Confidence in the Irish Financial System.” Ms Muldoon gave a fairly upbeat assessment of progress. I am less sanguine. The problem is not lack of international confidence in Irish banks and businesses, but rather lack of international confidence in Irish financial regulation. It is still not clear if the Irish Central Bank has the backbone for the tough tasks it faces in the current environment.
It is important to remember that the weak regulatory stance of the Irish Central Bank during the credit bubble period was one of the chief causes of the Irish economic crisis. The Irish Central Bank’s soft and timid approach, and its willingness to be swayed by political and business interests, was a major cause of Ireland’s economic disaster (for evidence, see my paper with Brian O’Kelly). Has the Irish Central Bank sufficiently altered its approach?
The Irish Central Bank has reformed enough so that if the challenges of 2002-2008 ever reoccur, it will be ready for them. This new resolve to block credit bubbles is not likely to be tested for many decades. The Irish Central Bank needs to have the strength and fortitude to deal with the very different challenges of 2013.
The Irish Central Bank showed no leadership during the fiasco of the 2009 Land Reform Act/Dunne Judgement. The previous government (perhaps deliberately) slashed a gaping hole in Irish financial contract law when it passed the flawed 2009 Land Reform Act. The flaw was pointed out by Justice Dunne, and the judiciary reasonably expected that such an egregious flaw (called a “lacuna” in legal parlance) would be fixed by amending legislation. However the legal flaw was politically convenient since enforcing mortgage contracts would have been politically painful at the time. Ignoring the Dunne Judgement and leaving the flaw in place was very poor practice in terms of restoring international confidence in the Irish financial system, but it was politically convenient for a domestic audience. The government did nothing at all about this legal flaw, despite the obvious impact on Ireland’s international reputation.
It took outside interference by the Troika to get this legal flaw fixed. The Troika repeatedly noted the unacceptable situation in their quarterly reviews, and when government action was still not taken the Troika demanded that the Irish government act by an imposed deadline or face a cut-off in national debt funding. Throughout this long, confidence-draining saga, the Irish Central Bank stood meekly by and said nothing. A stronger-willed central bank (US, UK, Germany, others) would have been screaming from the rooftops about the need to fix such a gaping hole in the country’s financial contracting law. It is not to the credit of the Irish Central Bank that we needed Troika intervention to get this problem acknowledged and fixed.
The Central Bank’s response, or lack thereof, to the explosive growth in mortgage arrears is another case where its stance was timid. Even by late 2011 it was obvious to hard-headed observers that some substantial fraction of the mortgage arrears explosion could be traced to strategic behaviour by households. Mentioning strategic default is offensive to many people since it means acknowledging that some Irish people are acting dishonestly in their own self-interest against the interests of society. A few people were brave enough to mention the obvious (take a bow, Karl Deeter!) but none at the Irish Central Bank. Up until early 2013, the Irish Central Bank effectively had a ban on any mention of strategic default by any central bank spokesperson. This gave rise to some stilted presentations, where Central Bank senior spokespeople railed about the explosion in mortgage arrears without any mention of one of the key causal factors. This omerta was finally broken by Patrick Honohan in early 2013. That was too late in the process to be an international confidence-booster. A strong imperative by the Irish Central Bank not to cause anyone any offence is not a good foundation for building international confidence in Irish financial regulation.
On the positive side, the Irish Central Bank’s actions against Quinn Insurance were tough and bold. So the bottom line is that in terms of restoring confidence the Irish Central Bank has a mixed record over recent years.
An interesting article on property debt restructuring deals by Mark Hilliard in today’s Irish Times, “Secret Deals on Mortgage Arrears Raise Concerns.” For many of us it will bring back our graduate school days studying Stiglitz, Rothschild, Ackerlof, Spence et alia on information revelation and efficient contracts. The laudable goal of the Irish mortgage debt arrears policy is to ensure that almost all householders who cannot pay their mortgages can keep their family homes. The difficulty is that it is virtually impossible to distinguish can’t-pays from won’t-pays except at untenable cost and personal privacy intrusion. So the unwritten “policy” is to restrict the flow of information to consumers regarding restructuring terms and conditions. This is intended to limit the flow of potential won’t –pays into the system. In the article, Noeline Blackwell of FLAC is quoted lamenting the lack of a clear detailed list available to consumers in terms of debt restructuring options. She is correct, but this lack of information is not a bug, it is a feature of the evolving Irish system.
The case of Pat Swords versus the Department of Energy etc continues. See here and here for its history. The media is strangely quiet. At stake is an injunction to halt the National Renewable Energy Action Plan (NREAP), but this case has ramifications for all relations between the rulers and the ruled, and for Ireland’ sovereignty.
There have been two sessions of the High Court, one on April 12 and one of April 16.
State argued that the case should be thrown out because the Aarhus Convention does not apply as it had not been ratified at the time the NREAP was accepted by the European Commission in 2010. This argument was rejected. Even though Ireland did not ratify the Aarhus Convention until 2012, the European Union had ratified it in 2005. Therefore, Ireland must comply with Aarhus.
Read that again: Ireland is subject to an international treaty it did not ratify.
The session is adjourned till June. State now has to engage substantively with the ruling of the Aarhus Compliance Committee, which has that Ireland failed to properly inform its citizens about NREAP and its impact and did not allow them sufficient time to engage with policy making.
It has been several years since I first came across Pat Swords. Pat demanded access to wind energy modeling work that he thought the ESRI had done but not published. There were many layers to our reply. The ESRI is not covered by Freedom of Information legislation. At the time, Ireland had not yet ratified the Aarhus Convention on Access to Environmental Information, so that did not apply either (but see below). Although it would have been appropriate for the ESRI to do a detailed study of the pros and cons of subsidizing wind energy, we had not. And no, we were not aware of someone else having done such a study either. There is no ex ante evaluation of wind energy subsidies in Ireland, and no ex post evaluation either. (And lest people protest, I am aware of a number of partial studies, and a number of not-independent ones.)
Pat lost interest in the ESRI, but not in wind policy. He asked every institution in Ireland he could think of “why do we subsidize wind?” Some replied in the vein of “because we do, now go away”. Others did not respond. So Pat asked the European Commission, with the same result. Although we do generously subsidize wind power, no official was able to satisfactorily answer why.
So Pat went to the United Nations. It first ruled that, because the European Union has ratified the Aarhus Convention and because wind policy is dictated by Brussels, Ireland’s wind policy is bound by the Aarhus Convention – a treaty Ireland had not ratified at the time.
The Aarhus Convention is not at all about wind. It is about public policy. The Aarhus Compliance Committee ruled that Ireland had failed to give its residents a proper say in the National Renewable Energy Action Plan (NREAP). Two failures were identified. First, there was insufficient information to inform a reasoned decision. Second, there was insufficient time given to deliberate and, if need be, protest.
The Committee did not say whether wind power is good or bad. It did say that decisions on wind power are dodgy.
This is a remarkable result in and of itself. The Irish government cannot justify policy decisions with a few half-baked arguments and ram it through the Dail. It often does, but there is now a precedent to call an end to such practice.
The story does not end here. Pat took the UN ruling to the High Court and asked for a judicial review of the NREAP. The judge agreed that there is prima facie evidence that things are not kosher and called a hearing, which is due to reconvene on March 13.
The government’s defense is that Pat’s protest comes far too late, ignoring that all his earlier protests were put aside and ignoring the UN ruling that insufficient time was granted in the first place. The government also argues that the EU has accepted the NREAP, ignoring that the UN ruled that the European Commission was just as much in the wrong as the Irish government.
Inexcusably, the government asked the court to be granted legal costs if they win. If he loses, Pat may have to pay the government’s lawyers.
Such bullying tactics may soon come to an end through another lawsuit, but they have not yet. It is immoral, though, that the mighty government seeks to throttle a judicial review by threatening to bankrupt a citizen who exercises his democratic right.
The government’s behaviour suggests that it knows it cannot defend its case for subsidies for wind power. Carbon dioxide emissions from power generation are indeed already adequately regulated by the EU Emissions Trading System. There is no reason to put subsidies on top. Many Irish households and companies would probably welcome cheaper electricity.
Pat comments on this case here.
The Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, Fiona Muldoon, has been widely praised for her speech to the Irish Banking Federation, calling for faster action by the banks in dealing with the mortgage arrears crisis. The speech makes clear that the damaging nexus of the former Fianna Fail government, linking the politically connected property development industry to the banking industry and an overly compliant bank regulator, is no longer in place. The Irish Central Bank is now able and willing to stand up to the industry that it regulates in order to protect the public interest, and it is supported in this stance by the ruling coalition. This is an important positive outcome.
The speech was a step forward, but it was not an unusually brave speech, despite the impression one gets from the wide praise it received in media coverage. A truly brave speech would not be widely praised, since it would need to unsettle people rather than confirm their existing beliefs. The speech ignores a big part of the reason for the mortgage arrears crisis – the deep-seated Irish political aversion to house repossessions. Without facing up to this big part of the mortgage arrears crisis, there will be no solution. Here is an extra paragraph, offered with proper humility, which might have changed Fiona Muldoon’s partly brave speech into a truly brave speech. I have kept the “teenagers” motif, which was a clever oratorical device in the original speech.
“I cannot come here and give a speech about mortgage resolution without once mentioning repossessions; that would be cowering. The notion that 167,000 mortgages-in-arrears can be resolved without a substantial proportion of repossessions is delusional. We on the senior Central Bank staff could give speeches ignoring this reality, thereby pandering to political sentiment, but we will not do so. Meanwhile, the government’s most recent attempt at reforming Ireland’s repossession laws was a shambles, and virtually the entire law was declared invalid by the Justice Dunne ruling in July 2011. This has left Ireland, and it’s banking system, with virtually no repossession system at all since that date. Rather than fix this urgent legislative cock-up of its own creation, the government has chosen to ignore it and pretend that it will go away. The ruling coalition is acting like a bunch of teenagers; blaming everyone else in the household for their problems while neglecting to do their own homework.”
In a piece in yesterday’s Sunday Business Post my colleague Dr Niamh Hardiman makes a plea for better understanding of the roots of our current crisis in weaknesses in governance institutions. Such an understanding is a precondition for effective reform. She addresses weaknesses in parliamentary scrutiny, the capacity of the civil service for appropriate engagement over policy making, and the effectiveness of the public service itself. She highlights institutional explanations for tendencies for public policy to favour sectional interests, but argues that understanding the institutional weaknesses is the key to addressing them. The article is behind a paywall, but a fuller, multi-author examination of the issues is available in a book arising from a UCD project on governance, Irish Governance in Crisis, edited by Niamh Hardiman (Manchester University Press, 2012).
A new issue of the journal Administration is out today.
To mark the journal’s ‘re-launch’, this issue is available in full for free online here.
As many readers will know, Administration is published by the Institute of Public Administration, and has been a key locus for research-led debate on economic development, and of course on wider developments in the public sector and society, since 1953.
The current issue includes prefatory articles from the incoming editor Muiris MacCarthaigh, who `sets out his stall’, and from Tony McNamara, who has edited Administration since 1989. These will be of interest no doubt to a wide readership and to various contributor bases, (e.g., from academic, practitioner and civil society perspectives).
As the contents indicate, the focus of this issue is on public sector reform, with an opening piece by Brendan Howlin TD, Minister for Public Expenditure and Reform. I guess that Ministers historically have been uneven in how or whether they contribute to debate at this level; perhaps this is a good cue to them, and to politicians more generally, to get their quills out.
Notes from the Editors:
- “Renewing public administration research and practice” by Muiris MacCarthaigh
- “A final word” by Tony McNamara
- “Reform of the public service” by Brendan Howlin, TD
- “Progress and pitfalls in public service reform and performance management in Ireland” by Mary Lee Rhodes & Richard Boyle
- “Regulating everything: From mega- to meta-regulation” by Colin Scott
- “Trust and public administration” by Geert Bouckaert
- “The reform of public administration in Northern Ireland: a squandered opportunity?” by Colin Knox
- Third report of the Organisational Review Programme
- The challenge of change: Putting patients before providers
My opinion piece in today’s Irish Times points out that the disbanding of the Better Regulation Unit in the Department of the Taoiseach risks reducing the capacity for effective oversight of regulatory institutions and strategies and for learning about and acting on regulatory successes and failures elsewhere in the OECD member states. A fuller policy brief on the topic, “W(h)ither Better Regulation?” is available here.
I hope there is no problem about my linking to the article I wrote.
In announcing its 80/20 negative equity insurance scheme, Nama management could have, but did not, provide estimates of the implicit cost of the insurance component of the package product. The cost is hidden in the package sales prices, which Nama management describe as “fair value prices” for the property. With a bit of work, it is possible to reverse-engineer the insurance-component cost from the scanty information provided by Nama.
Continue reading “Nama Scheme Increases Recorded Property Sales Prices by Approximately 7.5%”
Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Time: 8.30 – 13.00
The fourth ESRI Renewal Conference will examine the best available domestic and international evidence relating to the need for rapid economic adjustment. Papers will address:
- What explains the apparent inflexibility of wages in the Irish labour market?
- How can competition and regulatory policies help in economic recovery?
- What does evidence tell us about designing a property tax?
Papers will be followed by a response from an expert in the field and an open Q&A session.
8.30 Registration & Refreshments
9.00 Opening remarks: Frances Ruane, Director, ESRI
9.05 Explaining Changes in Earnings and Labour Costs During the Recession
Adele Bergin, Elish Kelly, Seamus McGuinness (ESRI)
9.35 Response: Kieran Mulvey, The Labour Relations Commission
9.45 Audience discussion
10.10 Troubled Times: What role for Competition and Regulatory Policy?
Paul Gorecki (ESRI).
10.40 Response: Cathal Guiomard, Commission for Aviation Regulation
10.50 Audience Discussion
11.45 Property Tax in Ireland: Key Choices
Claire Keane, John Walsh, Tim Callan, Michael Savage (ESRI)
12.15 Response: Dr William McCluskey, University of Ulster
12.25 Audience Discussion
To book a place at this conference, please register here
For further information please email firstname.lastname@example.org.
The Economic Renewal Conference Series is supported by FBD Trust.
If you would like to receive our monthly eNewsletter with news of ESRI activities and publications, please subscribe here.
The Minister for Public Expenditure and Reform has announced the Government’s plans for the sale of state assets. Interestingly, rather than sell a minority stake in the ESB the plan now is to sell non-strategic power generation capacity – in my view a more sensible approach.
The concept of “fire sale prices” is a useful one in many contexts – some examples are the October 19th 1987 US stock market crash, the LTCM crisis of 1998, and the 2007-8 US credit-liquidity crisis. In all three of these cases, security prices crashed in a particular sub-market, policymakers stepped in providing extraordinary credit-liquidity support, and eventually (quickly in the first two cases, slowly in the last) the capital market situation normalized. Unfortunately, “fire sale prices” is a useless or even harmful analytical tool for understanding the current Irish financial predicament. A better term for current conditions in Irish asset markets is stagnation prices rather than fire sale prices. Policymakers should look to Japan circa 1991 and the following two decades, rather than the USA, for a useful historical precedent. The fire sale concept gives the wrong policy guidance in the Irish situation; it is metaphorically like trying to use a fire hose to drain a swamp.
Andrei Shleifer and Robert Vishny have a series of papers exploring the use of the fire sale concept in modelling financial markets. There has been a large outpouring of papers by other authors with similar or related models, but the Shleifer and Vishny model is clear and simple and their survey is particularly good. They provide a definition:
“A fire sale is essentially a forced sale of an asset at a dislocated price…. Assets sold in fire sales can trade at prices far below value in best use, causing severe losses to sellers.”
They discuss how fire sales can cause financial and macroeconomic instability via credit and liquidity channels. In a related paper they laud US policymakers for their prompt and correct response in 2007-9 in injecting massive credit and liquidity into the markets for mortgage-related and credit-related securities caught up in the fire sale environment of 2007-9.
Fire sale mitigation policies are unusual as economic policies in that, as a rule, they should result in a net profit for the policymaker. This follows from the theory of the limits to arbitrage. This certainly seems to apply in the US case – the Federal Reserve made a trading profit of $79.3 billion in 2010 and $76.9 billion in 2011. The Fed vastly outperformed the best-performing hedge fund both years, at U.S. civil service pay rates, and without actually trying to make a profit. TARP was also profitable or near profitable, after an adjustment for the expensive but necessary bail-out of the US automobile industry. This is the nature of fire sale mitigation policies – they are about buying securities slightly below fair value and holding them temporarily on government account while injecting liquidity and credit.
The bad news is that this has near-zero relevance for Ireland. Irish asset markets are not suffering from a fire sale problem but rather from a long-horizon stagnation problem. The appropriate comparison case is not from the USA but rather Japan circa 1990. Japanese policymakers and financial institutions worked endlessly to slow the pace of adjustment, leading to an almost twenty year period of stagnation, suppressing growth and business innovation, and leaving a massive overhang of government debt. Irish asset markets need to be forced to adjust quickly and reach their new (much lower) equilibrium values with un-frozen free trading and clear, public pricing. This applies to banks, collateralized pools of debt, commercial leases, and commercial and residential property. Preventing this from happening is not preventing a “fire sale” rather it is guaranteeing a long stagnation. It could even last twenty years, as in Japan.
Another question – what is it about the US environment that gives rise to fire-sale-induced financial crises of typically short duration? Part of the answer lies in the USA lead in financial innovation. New financial innovations were key to all three fire-sale market crashes mentioned in the first paragraph of this post (portfolio insurance, statistical arbitrage, and numerous CDO innovations, respectively). High-frequency trading (the most recent big innovation) will be the likely cause of the next fire-sale-related crash, if one comes in the USA.* Ireland seems to avoid these fire-sale crashes, but is plagued instead by long-lasting periods of stagnation. Let us hope the current one is not dragged out for a decade.
*A post-script on HFT and the Tobin tax. After my last blogpost, Frank Barry asked me to give more details about Tobin’s use of the term “sand in the wheels” and its application in old-fashioned engineering. I do not know that much about the engineering use of sand in the wheels – I only heard Tobin discussing it in an interview. I now know that historically the sand in the wheels technique was used in the case of a metal (steel or iron) wheel aligned on a track and needing better grip, such as an old-fashioned railway wheel on a wet track. It is used for wheel-type mechanisms and not for gears with teeth. See Wikipedia for some details for those with an interest. I remember Tobin saying he was annoyed that many commentators mistook him as suggesting sabotage, and I remembered that key idea correctly. Sand in the wheels is a technique to improve, not hinder, performance.
In the comments on my piece on Irish Water, Paul Hunt reports back from his attempt to get the costings for water metering etc from the PWC report. This request was refused as it would be “commercially sensitive”.
To cite Paul, this is balderdash.
Irish Water will be 100% state-owned. Citizens of Ireland (of two of which I am the legal guardian) have the right to know what is going on in a company they (will) own.
Ireland is an unwilling party to the Aarhus Convention, which grants access to data except “where such confidentiality [of commercial and industrial information] is protected by law in order to protect a legitimate economic interest”. As Irish Water will be a monopoly, I do not think there is a “legitimate” economic interest in hiding data.
Unfortunately, state-owned companies have made a habit of hiding behind “commercial sensitivity” when there is none.
The Examiner has a story on the proposed LNG terminal at Tarbert in the Shannon estuary. This is a privately funded project and a welcome stimulus for North Kerry. As long as the developers play within the rules, public policy analysts should have no opinion on such matters. But as the gas market is so heavily regulated, private actors affect the public good. The LNG terminal would, for instance, improve the security of supply, which is very valuable.
Minister Rabbitte argues that Shannon LNG would increase the price of gas. This is absurd at first sight. Increased competition should reduce the price. The minister is right, though. To see why, we need to consider the gas interconnector from Scotland that lands in Gormanston in Co Meath, or rather the way in which its price is regulated: The annual cost of the pipe is distributed over the gas it carries.
The interconnector is a competitor’s wet dream. If you capture a small part of the gas market, the interconnector will increase its price — because its annual cost is distributed over a smaller volume. You can then increase your price to just below that of the interconnector and gain yet more market share. And the interconnector will raise its price again.
The solution surely is to change the regulation of the interconnector rather than to block the LNG terminal. The current regulation, which may date back to the days of Minister Woods or Fahey, is a neat example of something that makes sense in the short run only.
Note the separation of powers. Minister Rabbitte is the executive branch of government and an influential part of the legislative, he appoints and controls the budget of the regulator, and he is the trustee for the shareholders (us) of the dominant company in the market.