The central bank have just released their 2016 quarterly bulletin. Box A on Page 11 discusses the farce of the 26.5 per cent growth.
Quote:
“These developments reflect the statistical ‘on-shoring’ of economic activity associated with a level shift in the size of the Irish capital stock arising from corporate restructuring and balancing sheet reclassification in the multinational sector and also growth in aircraft leasing activity”.
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In addition:
Everyone agrees Ireland has a huge housing crisis. The housing “market”, if one can call it that, is completely dysfunctional. There is a massive shortage of supply, particularly in Dublin, and growing demand. Competitive firms are losing mobile workers by the day. Homelessness is on the rise. Rents are sky rocketing. Dublin house prices are back to silly-levels. The price-quality dynamic is totally out of kilter. Yet there is absolutely no reason why housing “supply” should be restricted.
There are literally thousands of empty properties around Dublin, loads of green and brown field sites, and tons of opportunities for housing development. Dublin is not San Francisco, where there is literally no where to build. The problem is that the banks are not lending. The government is intervening in a belated and piecemeal way. The fundamental question, therefore, is why? This is where economics meets politics. Constrained supply means rising prices. Rising prices makes it possible to manage the debt dynamics of the state. Supply is being restricted. It’s not a coincidence. It’s an outcome of incentives.
Yesterday’s “rebuilding Ireland” report is obviously welcome. However, all the policy focus on social housing and homelessness, whilst important, completely misses the core problem, which is that the banks control the market. The banks control the supply of mortgages and the supply of loans for development. In a housing market, if you control mortgages, property and builders, then you control the outcomes. It’s not in their interest to see a rise in supply. A rise in supply would reduce prices and expose the underlying debt dynamics of the bank’s balance sheets.
This is the real structural constraint facing government.
The banks don’t want anyone to sell under the asset (house) price to ensure that they can maintain their debt problem. If they can’t manage their mortgage debts, then the taxpayer has to step in and bail them out again, which clearly the government does not want to do. The structural problem underpinning the housing crisis is the bank-state nexus.
If NAMA or the banks fire sell housing assets to solve the housing crisis, then all those under performing loans/mortgages will be exposed. The debt dynamics of the banks will be exposed. The government will be exposed. Then the ECB is exposed. It’s a house of cards and the only thing holding everything together are rising rental and house prices. Those renting (and those who don’t own mortgages) are ultimately picking up the bill for the last crisis, of which they had no part.
Hence, the structural constraint underpinning the housing crisis is a convergence in the incentive structure to maintain sky-high rents and rising house prices. It’s not in the interest of the Department of Finance, the banks, NAMA, and mortgage holders to see a rise in supply and a potential fall in prices. This is not to suggest that all these actors are sitting around a table conspiring to restrict supply. But all these actors are clearly aware that rising house prices means lower debt and more wealth. The politics of debt is about the politics of housing capital.
The real policy solution is radical intervention to fire sale the assets.
Compel the banks to lend for real development. Compel builders to borrow. The objective should be to bring down rental prices and house prices. Let the banks take the hit, then let them pass it on to the government, then let the government pass it on to the ECB. In the end, Ireland will be back to where it started: in a one-to-one negotiation with the European monetary system. Except this time, the Irish government should say to the ECB, tough shit, you pay. Our public policy priority is ensuring proper housing for our citizens as a social right.
This policy response is obviously dreamland. But you get the point.
This blog entry is based on two research papers I am working on: “Housing Capital is Back” and “House of cards: the real politics of the Irish housing crisis”. Most of the data to empirically corroborate the claims I have made can be found either at the Central Bank (the “Financial Summary” statistics pack), and/or in the Ratings Agencies of the Irish banks.
The events of the last few days in Turkey brought back to mind this powerful snippet from Anglo-Irish writer Rebecca West’s account of her travels in Yugoslavia in the 1930s. Nothing to do with economics, and little related to present realities, but a passage that some might appreciate….
“There are thirty thousand Moslems in Sarajevo, and I think most of them were there. And they were rapt, hallucinated, intoxicated with an old loyalty, and doubtless ready to know the intoxication of an old hatred.
We came to the halt at the right moment, as the train slid in and stopped. There was a little cheering, and the flags were waved, but it is not much fun cheering somebody inside the tin box of a railway carriage. The crowd waited to make sure. The Moslem Mayor of Sarajevo and his party went forward and greeted the tall and jolly Mr. Spaho, the Minister of Transport, and the Yugoslavian Minister of War, General Marits, a giant who wore his strength packed round him in solid masses like a bull. He looked as Göring would like to look. There were faint polite cheers for them; but the great cheers the crowd had had in its hearts for days were never given. For Mr. Spaho and the General were followed, so far as the expectations of the crowd were concerned, by nobody. The two little men in bowlers and trim suits, very dapper and well-shaven, might have been Frenchmen darkened in the colonial service. It took some time for the crowd to realise that they were in fact Ismet Ineunue, the Turkish Prime Minister, and Kazim Ozalip, his War Minister.
Even after the recognition had been established the cheers were not given. No great degree of disguise concealed the disfavour with which these two men in bowler hats looked on the thousands they saw before them, all wearing the fez and veil which their leader the Ataturk made it a crime to wear in Turkey. Their faces were blank yet not unexpressive. So might Englishmen look if, in some corner of the Empire, they had to meet as brothers the inhabitants of a colony that had been miraculously preserved from the action of time and had therefore kept to their road.
The Moslem Mayor read them an address of welcome, of which, naturally, they did not understand one word. This was bound in any case to be a difficult love affair to conduct, for they knew no Serbian and the Sarajevans knew no Turkish. They had to wait until General Marits had translated it into French; while they were waiting I saw one of them fix his eye on a distant building, wince, and look in the opposite direction. Some past-loving soul had delved in the attics and found the green flag with the crescent, the flag of the old Ottoman Empire, which these men and their leader regarded as the badge of a plague that had been like to destroy their people. The General’s translation over, they responded in French better than his, only a little sweeter and more birdlike than the French of France, and stood still, their eyes on the nearest roof, high enough to save them the sight of this monstrous retrograde profusion of fezes and veils, of red pates and black muzzles, while the General put back into Serbian their all too reasonable remarks. They had told the Moslems of Sarajevo, it seemed, that they felt the utmost enthusiasm for the Yugoslavian idea, and had pointed out that if the South Slavs did not form a unified state the will of the great powers could sweep over the Balkan Peninsula as it chose. They said not one word of the ancient tie that linked the Bosnian Moslems to the Turks, nor had they made any reference to Islam.
There were civil obeisances, and the two men got into an automobile and drove towards the town. The people did not cheer them. Only those within sight of the railway platform were aware that they were the Turkish Ministers, and even among those were many who could not believe their eyes, who thought that there must have been some breakdown of the arrangements…
We had seen the end of a story that had taken five hundred years to tell. We had seen the final collapse of the old Ottoman Empire. Under our eyes it had heeled over and fallen to the ground like a lay figure slipping off a chair. But that tragedy was already accomplished. The Ottoman Empire had ceased to suffer long ago. There was a more poignant grief before us. Suppose that such an unconquerable woman as may be compared to the Slav in Bosnia was at last conquered this time, and sent for help to her old lover, and that there answered the call a man bearing her lover’s name, who was, however, not her lover but his son, and looked on her with cold eyes, seeing her only as the occasion of a shameful passage in his family history: none of us would be able to withhold our pity”.
The statistical distortions created by the impact on the Irish National Accounts of the global assets and activities of a handful of large multinational corporations have now become so large as to make a mockery of conventional uses of Irish GDP. I suggest four preliminary remarks to help overcome some of the challenges facing observers of the Irish macroeconomy.
Ratios to GDP are now almost meaningless for Ireland in most contexts. They need to be supplemented by alternative purpose-constructed ratios for specific uses, as the Irish Fiscal Advisory Council already proposed a few years ago with its weighted average of GDP and GNP for assessing fiscal sustainability – though that particular solution will no longer work well for the reason mentioned in point 1.
International statistical conventions should be revisited to help the interpretation of the data in a world where huge MNCs, legally controlled from small jurisdictions are moving assets around on this scale.
One natural approach is to apply the thinking underlying the current statistical treatment of financial intermediaries to this kind of MNC.
(One aircraft leasing firm that publishes its accounts has just 164 employees in Ireland – and just 221 elsewhere – but a balance sheet total of $44 billion, the bulk in the form of aircraft that are operated by other firms. I do not know how the statisticians classify it, but in economic terms it looks much more like a financial firm than a non-financial firm).
Failing international convention changes, it may be necessary to envisage a parallel set of accounts being also prepared for the Irish economy.
Thus, by the first quarter of 2016, personal expenditure was still just below its quarterly peak of eight years ago; it has been growing for twelve quarters since the trough at an annual average rate of 3.5%.
Government spending on goods and services (i.e. not including transfer payments) in the first quarter of 2016 was still six per cent below peak but has grown by 4.0% per annum on average in those twelve quarters.
Personal disposable income (a much under-used series; up to date figures not available yet); other elements of the government finances; building and construction investment are other series that remain valid and usable for understanding the relevant parts of the economy.
How do these recent growth rates in consumer and government spending compare with those registered in the decade before the bust? Much lower of course: consumer spending rose by an average of 5.6% per annum 1998-2008, and government spending by 4.9%. Recovery yes: boom no.