Category: Uncategorized

It was all the fault of foreigners

In the past week or so there have been plenty of attempts by the Dublin elite who have sleep-walked this country into catastrophe to blame others. For an example, see the quotations in this article. If Chancellor Merkel had kept her big mouth shut, the implication is, everything would have been alright.

This line of argument seems to imply that Ireland was simply facing a liquidity crisis — in which random events and loose lips can indeed sink ships of state. And, to be fair, there certainly was a liquidity crisis.

However, an awful lot of influential external observers believe that Ireland is also facing a solvency crisis, brought about by the suicidal bank guarantee of September 2008, and compounded by our lousy growth performance (10 successive quarters of falling real GNP, with more potentially to come). The Government could have chosen to listen to Morgan Kelly that evening, but it didn’t — after all, who would take such an irresponsible young person seriously! — and the rest is history. If it is a solvency crisis, then it was always going to come to this, as long as the Government tried to stand by that guarantee. Mrs Merkel may have been the trigger, but if she had stayed quiet there would, inevitably, have been some other trigger.

The really important point to make about what Mrs Merkel said is that she was right. There is indeed a limit to how much taxpayers are going to be willing to bail out bank creditors, and so there should be. If she, or the IMF, or any other external body, forces the sort of restructuring of bank debt that our own leaders have been so reluctant to contemplate, then ordinary Irish people will be very grateful to them. If the restructuring doesn’t happen this weekend or soon thereafter, then presumably it will be a major issue in the forthcoming general election campaign, and we will get an early test of whether Mrs Merkel’s political instincts are right.

Update: today’s FT editorial makes some very similar points.

More on the Four Year Recovery Plan

The Irish Times also published my reaction to the recovery plan yesterday.

Bank Resolution

It is being reported (by eg Simon Carswell on the Irish Times website) that, in addition to the four-year fiscal framework, there will be an early resolution of the banking issues as part of the IMF/European deal.

De-leveraging the banks further through private sector deals for bank assets, including non-NAMA impaired assets, has long been an option, as argued here before. The tracker mortgages constitute an impaired (though performing) asset which can no longer be marked at par (as appears to have been the case) in computing the balance sheet hole if market disposal is contemplated. Carswell uses the phrase ‘heavy discounts’ and on the face of it the cost of funds, minus the c. 2% return on these mortgages, put them well under water. There are moving parts – the ECB funds are cheap, for example, and the replacement liabilities, and their cost, is unknown.

The banks wrote a very large piece of derivative business when they extended these mortgages and did not (or could not) hedge, so far as I can see. The risk is in the form of an uncovered exposure to an interest rate spread beyond their control. It looks as if this is about to be marked to market.

Irish Economy Note No. 12: “Sliding Doors Cost Measurement: A Restrictive Approach to Analyzing the Net Economic Cost of Policy Decisions and an Application to Irish Financial Regulation”

In Irish Economy Note No.12,  Greg Connor and Brian O’Kelly consider the costs of lax regulation during 2003-2008

Abstract: This paper develops a restrictive procedure for evaluating economic policy decisions, by  comparing actual economic history to a simulated history where a specific policy decision is  replaced with a counterfactual, but credible, alternative. Our procedure is theoretically  straightforward, but empirically problematic since it requires the identification of a feasible policy alternative and a model linking a specific policy choice to subsequent economic outcomes. We apply the procedure to the mistaken decision to maintain an excessively lax financial regulation regime in Ireland during the period 2003 – 2008. We measure the  differences in banking sector stability and national income that would have occurred if the stricter regulatory regime imposed in Ireland in 2009 had been put in place six years earlier. We find that a few simple, reasonably prudent regulatory controls on the Irish banking sector would have greatly limited the vulnerability of the domestic sector to the 2008 global credit freeze, and almost certainly prevented the 2008-2009 collapse of the domestic banking sector and the consequent deep Irish recession of 2009-2010.  On the other hand, the risky and unsustainable inflow of foreign capital mediated by the domestic banks accounts for a substantial part of Irish economic growth during the 2003-2007 period. Without this net
foreign borrowing inflow, cumulative gross domestic product over the early period would have been substantially lower.

Economics seminars in Dublin next week

Next week sees a lot of activity on the seminar front.
1.  Tuesday November 23

Economics and Psychology One Day Session: UCD Geary Institute

We will be hosting a session on Economics and Psychology in the UCD Research Building on November 23rd. Those who wish to attend should RSVP to Philippa Barrington at geary@ucd.ie. Please indicate whether you wish to attend the full-day session or the keynote lecture by Professor Laibson only.  There is no registration fee.

Includes 4pm – 5.30pm: Keynote Speaker.

David Laibson (Harvard) “Natural Expectations and Economic Behavior”

More details here.

2. Thursday November 25

The second Geary Lecture of 2010 will be given by Professor Canice Prendergast, W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business.

Venue: ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Date: 25/11/2010
Time: 4 p.m.

For the last couple of decades, there has been a large body of work arguing for the widespread use of pay-for-performance as the appropriate means of aligning the interests of workers with those of their employers. This lecture outlines recent contributions to this body of work, and focuses on a number of general themes. First, the successes of pay-for-performance schemes are limited to a small class of agency settings that do not seem to generalise to other settings. Second, the literature has now begun to consider instruments other than pay as the most natural way to align interests. Finally, there is controversial literature in psychology that now challenges the basic assumptions of this strand of economic literature. The talk will review all these recent contributions, and likely directions for future research.

Canice Prendergast, who was a research assistant at the ESRI from 1983 to 1985, is now one of the world’s foremost researchers on workplace incentives and their impact on productivity. He is currently the W. Allen Wallis Professor of Economics at the University of Chicago Booth School of Business.

The Geary lecture is organised each year by the ESRI and honours Dr R. C. Geary (1896 –1983), the first Director of the Institute.
This is one of the special events being held during 2010 to mark the Institute’s fiftieth birthday.

Booking
Attendance at the event is free but must be pre-booked. There are a limited number of places available and early booking is encouraged. To book a place, please send details of attendee’s name, organisation and contact telephone number by email to admin@esri.ie.

3.  Friday November 26

Canice Prendergast will also give an academic seminar at 1pm on Friday 26 November in the ESRI seminar room.

Contracts and Conflict in Organizations

Abstract:

In many organizations, the way that incentive problems are alleviated is not via contracts, but rather who is hired. This paper offers a theory of targeted hiring, and how its role changes as contracting becomes poorer.