Friday, October 31, 2008
Greg's talk is now available here - well worth a listen. A podcast of my response is available here.
Image - I couldn't resist it! - is from the wonderful Mental Floss.
Thursday, October 30, 2008
The first is straightforward: the Government should be locking in oil futures at present low prices for the 3-5 years time as the current weak price will not last. We have a temporary fall in price due to weakening global demand: but 'normal' pressures will be resumed once recovery sets in. By normal I mean rising oil prices against a worrying background of supply shortages and shocks. The Financial Times reported yesterday that a failure to invest in oil exploration and production could see global oil output falling by 9.1% a year. They were reporting on a forthcoming International Energy Agency report on the outlook for the energy sector. Interestingly, the IEA subsequently denied that they were intending to produce any such analysis.
An additional aspect of the energy window of opportunity we now face is that it will be an awful lot cheaper to build the kind of infrastructure necessary to support our energy security. Not only in terms of East-West interconnectors but also in terms of grid expansion, renewable energy generation capacity and, eventually, nuclear power. Land, labour and materials will all be a lot cheaper for some time to come - access to capital via PPP initiatives involving Government co-funding should sort the financial hurdle.
So much for energy security: the bigger story is that of energy entrepreneurship. Forfás yesterday published a clear and realistic guide to the the potential for Irish businesses in the expanding Environmental Goods and Services (EGS) sector. If you're in a hurry just go to Appendix 1 on page 35 of the pdf for a straightforward assessment of the potential and prospects for Irish businesses in the various sub-sectors: a market worth €2.8 billion already.
Technology is going to play a key role our energy future - not just ECG related but also IT: as explored in a superb report on Climate Futures from the Forum for the Future which looks at scenarios out to 2030. I especially like the report's focus on the role of markets - usually seen as barriers rather than enablers by too many environmental activists. Here's their take:
Some of the strongest objections to addressing climate change have been that we will constrain markets, and hence our freedom, at too high a cost. People have feared that climate change was a cover for rolling back the market reforms of the last decades. But in our scenarios, liberal market-based solutions seem much less attractive as time goes on than statist responses. This puts a different light on how to defend freedoms from market reforms. Advocates of liberal markets should act as soon as possible, pushing for a global agreement with teeth, national measures that use financial incentives, and the removal of market distortions that encourage unsustainable and wasteful resource use. The result may be a more constrained market system than today, but the long-term alternative could be a desperate turn to big government and protectionism.We need more of this kind of thinking, and analyses like those of Forfás, if we are to fully exploit the energy window now opening. I just hope short term squabbles about the Budget don't derail the kind of measures we need to take and soon. The window will only be open for a short time.
But do check it out for yourself (it's a long video, but gets really interesting after 3-4 minutes) - I think the emerging 'app economy' is going to be awesome, with big opportunities for Irish developers:
Wednesday, October 29, 2008
Inded, the scale of the recovery task is enormous. The Bank of England yesterday published the latest of its Financial Stability Reports. I got this graph from the current issue: it shows a composite measure of liquidity in the financial system: last month the index was over 2 standard deviations below the long run trend - there's the credit crunch. The Bank's report is very up to date and written in clear, concise language - well worth a read if you have the stomach for it! In light of yesterday's decision by Halifax Bank of Scotland (Ireland) to stay out of the Irish Government's Guarantee Scheme then Table 1 on page 32 of the BoE report provides some context. It shows that HBOS's Tier 1 Capital Ratio (one measure of financial security) will rise from a current level of 8.6% to 12% once the UK Government measures are in place. RBS will be even higher.
But while the banks are putting their house in order, there's a whole new generation of young people who will never see them in the same light again. Which probably goes for their parents as well.
Tuesday, October 28, 2008
I've been involved in many opinion polls over the years and you usually only have a few options as to how to treat the undecided respondents when reporting the results:
a) ignore them and just assume they won't vote
b) include them, but allocate them pro-rata to the Decideds
c) as with b), just adjust for what people with the same demographics intend voting
d) use their previous voting behaviour to predict their future behaviour (assuming they remember how they voted before ...)
e) some combination of all of the above
Fortunately behavioural economics and neuroscience is starting to shed a bit more light on the minds and indecisiveness of the Undecideds, according to the New York Times. Though it may be too late for the US Presidential Election, perhaps we'll get to play with a few EEG-connected voters in the run up to the next Irish election ... ;-)
I suspect there's a lot more price cutting going on than is obvious - and not just in the supermarkets and discounters. Some of it is starting to show up in the CSO's inflation measures: furniture, clothing, electrical goods, some food items and some services are showing year-on-year price falls. But the overall inflation rate is still positive (4.3% in September).
I suspect however we are only at the start of a massive price reversal: with falling oil and commodity prices just some of the indicators of the coming deflation. Recent forecasts for Irish inflation from a variety of sources all assume inflation falling sharply to just 2-3% next year: and perhaps even further to 0-1% in 2010. The justification for such a projection is straightforward enough:
- falling input prices (energy, commodities)
- falling interest rates (feeding through to mortgage rates)
- falling demand (recession)
- rising unemployment (easing wage rate rises)
- a strong euro relative to dollar/sterling (supporting falling input prices)
But could it go further? Could we witness falling prices - not just lower rates of price increases - over the next few years? We already are in certain sectors, as already noted. But could deflation become an economy-wide phenomenon? Some commentators are beginning to think so. Among them is Nouriel Roubini, or Dr Doom as he is 'affectionately' known. Credited as the man who saw the credit crunch coming, Roubini is now explicitly forecasting deflation in the United States, and by extension in many of its trading partners. Indeed, some financial indices in the United States are already indicating deflation - for the first time ever in the case of some measures.
So what will deflation mean for Ireland? For consumers in the short run it can only be a good thing: a fall in prices is equivalent to a rise in disposable incomes - other things being equal. And the supermarkets are doing their bit to lead the deflationary charge. But for businesses deflation can be a nightmare. Especially those that are highly leveraged through borrowings. Though some costs may fall, not all fall or fall very slowly, e.g.: wages. And nominal interest rates can't fall below zero: so there is a floor beneath which debt repayments don't fall. While on the other hand consumers may be looking for bargains and special offers (expect more haggling at shop counters is one forecast I feel confident about), service businesses especially (i.e.: most of us) will struggle to respond.
But Roubini doesn't expect it to last indefinitely - just 18-24 months before the longer term trend in upward pressure on commodity prices in particular returns. That's still a long time to wait if you're facing falling prices and falling demand for your products and services. Probably too long for some businesses - their failure will be the inevitable fall out from any ordinary recession. Only this one isn't/won't be the least ordinary.
Monday, October 27, 2008
As with so many features of the current crisis, Irish banks are affected by a vicious double-whammy of global and domestic developments. I've covered the global dimension in a previous post, and here I want to focus on domestic trends. The first and most obvious is the recently enacted Credit Institutions (Financial Support) Act 2008 which must surely rank as one of the most extraordinary acts of peacetime legislation ever introduced in this country. If you have any interest in understanding what is going on right now - and what the future holds - you should read the Act. It's only 10 pages long and written is very clear, very blunt language (drafters of the Lisbon Treaty please note).
Take section 7 of the Act:
7.—(1) This section applies to a merger or acquisition (within the meaning of section 16 of the Act of 2002) that involves a credit institution or subsidiary where the Minister—In other words: the Minister for Finance has the final say on bank mergers and acquistions - competition law has been suspended when it comes to financial institutions covered by the Act. There's more further on in the same Section 7:
(a) after such consultation with the Central Bank and the Regulatory Authority as the Minister considers necessary, is of the opinion that—
(i) the proposed merger or acquisition is necessary to maintain the stability of the financial system in the State, and
(ii) there would be a serious threat to the stability of that system if the merger or acquisition did not proceed, and
(b) certifies in writing to the parties to the merger or acquisition, the Competition Authority and the Governor that he or she is of that opinion.
(2) Notwithstanding anything in the Act of 2002, a notification of a merger or acquisition to which this section applies shall be given to the Minister and not to the Competition Authority.
(12) The Minister may approve a merger or acquisition to which this section applies even if he or she forms the opinion that the result of the merger or acquisition will be to substantially lessen competition in markets for goods or services in the State but that the merger or acquisition is necessary having regard to any or all of theIn other words: the consumer comes last (but gets to foot the bill as the taxpayer). This is wartime legislation for a peacetime crisis: like I said, quite extraordinary.
(a) maintenance of the stability of the financial system in the State;
(b) the need to avoid a serious threat to the stability of credit institutions;
(c) the need to remedy a serious disturbance in the economy of the State.
There's only one problem: IT ISN'T WORKING. The four financial institutions whose stocks trade on the ISEQ (AIB, Bank of Ireland, Anglo-Irish Bank, Irish Life & Permanent) have all suffered losses today - following on from those last week. So what next? Plainly the legislation is designed to enable the Minister to oversee a rapid, radical re-structuring of the Irish financial landscape. My guess is that we'll see mergers in the coming weeks (if not days) as further weakening in bank balance sheets forces them - and the Government - to move sooner rather than later or risk becoming insolvent.
It won't stop there of course. It can't. The newly merged banks/building societies will need to re-capitalise, and quickly. That is where you and me come in: we get to watch the Government use our taxes to 'invest' in the banks much as the UK Government has done. The state then becomes the largest shareholder (at the same time as existing shareholders are dumping the stock as fast as they can ...)
So then the nightmare will be over, right? Wrong: there's still the global dynamic that unfolding as I write. We will see trading suspended in stock markets around the world as the grip of the liquidity trap fails to loosen. Governments have dropped the atom bomb of rate cuts to no avail. Last stop is the hydrogen bomb: the direct purchase of stocks in the markets by Governments to put a 'floor' under prices.
If I was the Minister for Finance I'd try not to use up all the cheques in my chequebook just yet - you never know who might come knocking at the door next. Trick or Treat?
Sunday, October 26, 2008
Ambrose Evans-Pritchard analyses 'the biggest currency crisis the world has ever known' - coming to a foreign exchange market near you. It is not for the faint hearted. Western European banks are at the centre of a currency storm now under way in emerging markets in Eastern Europe, Latin America, Asia and Russia. Several American banks blew up (so far) in the credit crunch: with combined losses of $1 trillion. European banks exposure to the crisis in emerging markets stands at $3.5 trillion ...
Ambrose has this to say:
Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.The result is a convulsion on the eurozone's borders: but one that is nevertheless affecting EU member countries. Hungary last week raised interest rates from 3.0% to 11.5% to stem capital outflows. Romania raised its overnight rate to 900%! With falling oil prices we may well see Russia repeat its infamous default (in 1998) as it struggles with growing dollar liabilities. Indeed we may be in for another round of co-ordinated actions by governments to head off the crisis - this time lead by China.
Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July.
Though most of these developments have received remarkably little attention in the Irish media (still obsessed with the political fallout from protesting pensioners), we are not immune from the consequences. Friday's collapse in financial stocks on the ISEQ indicates that a lot of fund managers are sensitive to both domestic and foreign threats to the security of Irish banks. Meanwhile key indices of credit sclerosis in the financial markets - the TED spread and Libor - remain at multiples of 'normal' levels.
Next week looks like being another horrible instalment in the unfolding drama we've lived through these past few months. Just as well there's a bank holiday tomorrow - they need one.
But protest marches rarely change anything - though they have a therapeutic effect in reminding us we live in a democracy where every voice (and vote) counts. In the end the cruise missiles left because the Soviet Union imploded and not because Maggie and Ronald were persuaded by our rhetoric (Maggie Maggie Maggie, Out Out Out). 'Tis often the way.
Nevertheless we're going to have a lot more protests here in Ireland: we've had the pensioners and the students - next up are the teachers and the farmers. I guess we private sector workers ought to schedule a march - though it's kind of difficult when you're too busy, er, working. In fairness the pensioners do seem to have secured change by their protests, though as is the way of these things the burden they were being asked to bear has now been passed on to others - i.e.: the taxpayers who now face an income levy of 3%. I love that word 'levy', by the way: sounds far more reasonable than 'tax'.
But we're only at the start of the protest season. The big ones will come when public sector workers start marching. I see that happening early in 2009 when our increasingly disfunctional government is forced to introduce another Budget, this time containing serious cuts in the pay and numbers of public sector employees (and more levies - or taxes - for the rest of us).
Though everyone is now acknowledging the unsustainable nature of public sector pay and pensions (and not just in Ireland) nobody has set out what exactly has to be done. So here's my starter for ten - all builds and alternative suggestions welcome:
- Freeze the pensions of all public sector retirees so that we no longer have the insane situation of pensioners getting 'productivity' rises because they've been paid to those now doing the jobs they used to do.
- For those public sector workers over 50 announce that their pension will be tied to their income upon retirement, but not rise thereafter (still a form of defined benefit pension).
- For all public sector workers under 50 announce that their pensions will be defined contribution pensions, tied to the performance of the national pensions reserve fund.
- Ensure that the pension contributions of all public sector workers are adequate to meet projected requirements.
Friday, October 24, 2008
Watching it I was thinking how long ago it seemed and how quaint the nostalgia for Ireland's failed Bolshevik revolution evinced by some of the contributors. So I was more than a little disturbed to learn today that the Irish Government has just appointed 20 Political Commissars in the six banks covered by the Credit Institutions (Financial Support) Act 2008 that they've all had to sign today.
Back in the Soviet era, the role of Commissars was to be the Party's eyes and ears in the military and wider society. The Financial Regulator assures us that his new cadre of Officers will be the eyes and ears of the Government, to put manners on Irish banks. None of whom have received a cent from the Irish taxpayer, by the way.
We live in dangerous times - and I don't just mean in terms of economic uncertainty. We now have the Government running the financial sector - and restricting the freedom of banks to respond to the needs of their customers as they see fit on behave of their shareholders. As one commentator has noted about the nature of Government intervention in the United States:
In moments of rhetorical enthusiasm, freedom lovers often declare that the love of liberty cannot be stamped out. They are wrong. It can be, and it has been. For most people, however, no stamping is required. All that is necessary is that people, whether they approve or not, be made subject to extraordinary government powers, which are always justified by the supposed dangers of the moment. Keep people in this condition for a few years, and most of them will accommodate themselves to it, first in their actions and eventually in their thinking, as well. After a while, they will have lost not only their old liberties, but also their yearning to be free.We live in extraordinary times - we need to be extraordinarily vigilant for liberty's sake.
Wednesday, October 22, 2008
The most interesting point came towards the end of the interview when Roberts asked Shirky what he thinks might be next after Wikipedia, Linux, Flikr and the like. Shirky's answer seemed a bit banal until I thought about it afterwards. Essentially he foresees the emergence of what he calls a new form of incorporation - or a legal licence for collective action. In other words the evolution of virtual companies: without the physical infrastructure of a head office, full time management or any of the usual overheads ... Apparently there's a rush on in the United States for the first State to legislate for such an entity. Opportunity for Ireland Inc there perhaps? We used to do that sort of thing - before we started obsessing about land and buildings and property and stuff.
The essence of Shirky's thesis is that the rationale for large organisations - that it's cheaper to insource certain tasks rather than outsource them - is being undermined by the net. He may be right. One delightful example of how the web is changing the way we do things is Photomake from Ponoko (HT to the always inspiring Springwise for the story). It's a service whereby you can draw your own design (say for jewellery), take a photo of it and upload it to the Ponoko site. They will then desktop manufacture it from one of a range of materials and mail it back to you.
It's also a great example of Shirky's idea of the cognitive surplus, i.e.: what happens when people are released from their half time job of watching television (the average time per adult in the West is 20 hours a week, or about half the time spent working). They start to create things like Linux and Wikipedia - and, er, blogs.
Looks like we'll get to design our own future. I'm cool with that.
But it does point to the corrosive impact of our dysfunctional governance: as Marc Coleman points out in his book The Best Is Yet to Come, we don't have one government in Ireland, we have 100 governments. Made up of local authorities, regional structures and national government.
And it is the perpetual fear of giving offence to someone - anyone - that results in the extraordinary gridlock now gripping the government. Maybe we're better off without heroes or leaders, but I still think we deserve better - and rather less government, come to think of it.
Tuesday, October 21, 2008
But maybe we take savings too seriously? In the United States they are already beginning to worry that consumers' rush to save (or reduce their debts) is exacerbating an already severe downturn, reducing consumer spending when the economy can least afford it. Could it happen here? Perhaps. Consumer spending equals 70% of US GDP versus 55% here: so the US is clearly more vulnerable to a downturn in consumer spending. Nevertheless, the recent economic forecast from Goodbody Stockbrokers shows a sharp decline in Irish consumer spending next year (-3%), driven, in part, by a rising savings ratio.
Such a reaction is normal and foreseeable of course - and self-correcting over time. But more worrying are some of the ideas currently being stitched into the Irish Government's Guarantee Scheme for the banks, expected to be implemented later this week. Take, for example, the proposed conditions (clause 36 in the draft pdf on the Department of Finance's website) in relation to how much money banks covered by the scheme can lend:
In particular the Regulatory Authority in consultation with the Minister shall monitor and review the expansion of the activities of covered institutions benefiting from the guarantee in order to ensure that their aggregate growth in balance sheet volume is not excessive and does not in any event exceed:Sounds like a lot of micro-management to me: and worse, a possible constraint on bank lending capacities as the economy starts to pick up towards the end of the two year period of the scheme. I'm no monetary economist but I worry about the ability of regulators to determine the lending capacity of financial institutions - they haven't done a great job so far.
36.1 the annual rate of growth of Irish nominal GDP in the preceding year; or
36.2 the average annual historical growth in their balance sheets of Irish credit institutions during the period 1987-2007; or
36.3 the average growth rate of the balance sheet volumes in the credit institution
sector in the EU in the preceding six months,
whichever is the higher. In case of any breach of this obligation, the Regulatory Authority shall adopt, within four weeks, appropriate measures to restore the situation and inform the European Commission thereof.
I hope I'm wrong, but I can foresee a dangerous deflationary scenario developing whereby consumers aren't spending and banks aren't lending just as we need both to get economic growth back on track going into 2010. We might just get all those rainy days we're saving for ...
Sunday, October 19, 2008
Theirs is a green version of the socialist schadenfreude more common among the Irish commentariat. Though the NS version starts with the same premise - modern capitalism is more a curse than a blessing and just can't go on as evident in the current crisis - it nevertheless goes somewhere rather different to where the Lefties would likely want to end up. Or most everyone else for that matter. But in fairness to the New Scientist they do actually have a go at painting a picture of Utopia - or Life in a Land without Growth. Here are just few highlights:
In our society, scientists set the rules. They work out what levels of consumption and emission are sustainable - and if they're not sure they work out a cautious estimate ...They kindly spare us the details of what will happen to those who object to this state of affairs: sustainable concentration camps perhaps? Still, I do admire their willingness to publish this stuff, and I don't doubt the genuiness of their intentions. Which is the scary bit really. As science fiction-type images of the future go, the New Scientist version is not much different to that brilliantly portrayed in Ira Levin's novel This Perfect Day. Think of it as a sort of kinder, gentler fascism.
We are gradually redistributing resources by setting upper limits for income inequality. It was tricky deciding what the permitted range of incomes should be - one that rewards real differences and contributions rather than just multiplying privilege. ... As a first step, we are aiming to lower the overall range to a factor of 100 ... Eventually, we may try to bring this down to a factor of 30.
We are gradually raising the percentage of money deposited that banks are required to keep in reserve. As a result, commercial lending is declining - banks get their income by financial intermediation and service charges instead - and we are moving to a culture in which you have to save money before you can lend or invest it.
Without as much economic growth as before, we can't maintain full employment - but then, our old growth economy wasn't so good at doing that either. Instead, people work part time, generally as a co-owner of a business rather than as an employee. The whole pace of life is more relaxed. Incomes are lower but we are rich in something that many of us had never experienced before: time.
Completely free trade isn't feasible any more, of course, because we have to count many costs to the environment and the future that foreign firms in growth economies are allowed to ignore.
One of the toughest issues, politically, has been population. We know that we will have to stabilise our population - and that includes immigration rates as well as birth rate.
One of the contributors to the special issue of the New Scientist is Andrew Simms - a regular contributor to the Guardian and policy director at the New Economic Foundation. For a sense of where current 'new economic' thinking is going you just have to read his piece in today's Observer on how it is possible to design an economic system that is not dependent on the invisible hand. One idea is to get local authorities to make local businesses dedicated 10% of their staff's time to helping the local community. Notice how there's never any choice in these utopia's they are so keen for us to join them in?
What's maybe more surprising than the fascist undertones of the new economic agenda is their lack of originality. As Jonathan Wolff reminds us in a fascinating interview over at Philosophy Bites, Karl Marx speculated about a world in which labour was no longer alienated. Frankly it sounds a lot more fun than what the New Scientist has in mind for us. Though no disrespect to Dr Marx or Mr Simms I'd really prefer to just make my own choices about what future I want - if you don't mind.
Here in Ireland our own Greens are showing a lot more common sense than their counterparts elsewhere. Being in government probably does that to you I guess. One sign: green advocate John Gibbons writing in the Irish Times last week suggesting that maybe we need to reconsider the nuclear option. Welcome to the club John! And let's leave utopia where it belongs: in the science fiction section of our local book shops.
Saturday, October 18, 2008
Naturally this has been greeted with delight by those on the Left. Paul Gillespie treats us to a classic example of socialist schadenfreude as he reports in today's Irish Times that sales of Marx's Das Capital are soaring in Germany. Gillespie suggests that the current crisis is "a real challenge and also an opportunity for the left - just as it was for Marx and Engels 150 years ago."
His analysis, and much else published in recent weeks, amounts to nothing more than Apocalyptic Marxism: a sad parody of Marx's original thinking, more akin to Book of Revelations end-of-days fantasy than real indepth analysis. Marx as Nostradamus - who'd have thought it?
Brendan O'Neill recently set out a far more considered assessment of whether we have seen the belated triumph of 'Financial Marxism'. He derides Cappuccino Socialists like Paul, observing that:
One reason why sections of the cultural elite (Jenkins labels them ‘Guardian writers and Labour politicians’) can take pleasure in the credit crunch is because this is a ‘safe’ capitalist crisis: there’s no organised or revolutionary working class seeking to overthrow the capitalist system and replace it with something else, only the disorientation of the capitalist elite itself. You can bet a banker’s bonus that these observers would not be chortling into their cappuccinos if there were a serious challenge to capitalism. Indeed, the ‘Marxism’ that some of these bloody pinko liberals have embraced in response to the credit crunch is one entirely denuded of its subjective, ideas-based, history-making element, and transformed instead into a deterministic creed in which things inevitably collapse as the besuited, benighted opinion-forming classes look on and laugh.Which captures in a nutshell my problem with a lot of what passes for an Irish socialist critique of the current crisis: it's usually written by people employed by media organisations (e.g.: Irish Times, RTE) that are crucially dependent on the advertising spending of the capitalists they derided to pay the same commentators' salaries. Hand-bite-feed. As O'Neill puts it: theirs is a form of 'droolism' rather than anything deeper.
The real issue, of course, is the role of the state: both in causing the current crisis and in solving it. Socialists major on the latter, trumpeting how the state had to come to the rescue of free market capitalism. I agree - the state has rescued a version of capitalism: but I take serious issue with describing the status quo ante to this crisis as 'free market'. Take the role of the politicians in priming the pump of excess in the United States. As noted by the Catholic-leaning Acton Institute:
Something more was at work in the present crisis, a crisis of unprecedented scope. Why didn’t profit-minded loan companies run thorough credit checks? Why did they keep pumping out low interest loans to high risk borrowers, ignoring the risks? It’s as if somebody spiked the financial system’s punch bowl with stupid juice, driving normally prudent financiers to dash, en masse, over the cliff. It seems that way because it is that way. The brewers of the stupid juice were largely (if not exclusively) politicians in Washington who sought to redistribute wealth from the rich and middle class to poor people with bad credit. These politicians fostered various laws and institutions that directed, cajoled and legally bullied mortgage companies to extend big loans to people with little credit.Or take this analysis from the Wall Street Journal which asks why the regulators encouraged investment banks to take on far greater risks than was wise in hindsight (remember - regulators are the state):
One fair question is how such regulation could have allowed Wall Street to employ so much more debt than the commercial banks. Part of the answer is that, instead of a fixed capital ratio standard, Basel II uses mathematical models crunching historical data to determine how risky an institution's assets are and therefore how much capital it needs. For this reason, when the investment banks switched to Basel II in the middle of a housing boom, AAA-rated mortgage-backed securities appeared almost as safe as cash. Oops. The models allowed Wall Street to add too much leverage. By the same token, because risk models will now look back and see several awful years of default rates, they may force banks to be overly cautious.Nevertheless, it seems clear that the momentum behind even greater state intervention in the economy looks likely to gather pace rather than reverse. The 1980s saw the de-politicisation of economics throughout the Western World - the consensus was that governments should regulate not manipulate the markets. But now we are seeing the re-politicisation of economics (witness the reaction here in Ireland to the Budget last week). While this will be welcome by some, the consequences are, sadly, inevitable in terms of worse outcomes. As Frank Ferudi notes:
The most important consequence of the economic crisis is likely to be the re-politicisation of the economy. This could lead to more demands for extending and deepening the system of financial regulation, and for the state to adopt a greater role in economic affairs. In one sense, such a re-politicisation of the economy would not be a negative development. It may well encourage a more serious public debate about issues that are fundamentally important to people’s lives. However, the downside of the re-politicisation of the economy is likely to outweigh the benefits. After the rescue of the banking system, the state will be under pressure to adopt a more active role in the economy – and the current pragmatic approach of the state may well give way to a more statist tendency towards micro-management and the bureaucratisation of economic affairs.That way lies madness. Just ask your bank manager.
Friday, October 17, 2008
I came across it via The Long Now Blog, naturally. I find Eno quite inspiring - he's been around even longer than me and he's still got the creative energies and outputs of a man a third his age.
Have a look:
Thursday, October 16, 2008
The highlight for me was the talk by John Herlihy, Google's EMEA director of online sales and marketing. One statement in his opening comments caught my attention: 'broadband is like oxygen'. He then pointed out that countries that are not up to global standards when it comes to broadband (including wifi and mobile broadband) are not standing still, they are falling rapidly behind. I couldn't help feeling he had in mind countries like the one I could see out the window behind him, from the vantagepoint of the 7th floor of PwC's impressive new offices on the Liffey.
As I've said before, if talk could build infrastructure then we'd make Scandanavia look like, er, Ireland. Obviously John was talking from the vantagepoint of Google's world view - and what a view. We are lucky indeed to have Google's European foothold located here in Ireland. But achieving the full potential of that investment will take a great deal more than platitudes. As John observed, the reality is that our education system is not producing graduates with the types of skills they need (e.g.: data analysis - Russians are the best apparently as they produce lots of maths graduates; and translational skills - there are more fluent English speakers in India than in Western Europe, including the British Isles!).
PwC had arranged for some local digital entrepreneurs to demo their wares to the audience after the talk, including the marvelous Sophia's Diary. It was a nice reminder that we have lots of talented people in this country, more than capable of delivering the wealth and employment creating businesses that we will need to maintain and improve our standard of living in the years ahead. Capital-strapped banks and cash-strapped governments permitting.
But sometimes great things come from inauspicious beginnings, as this story reminds us. The message: keep the digital faith.
Wednesday, October 15, 2008
Let's face it: if you were going to start from scratch and design a system of taxation and spending to meet the consensus needs of the citizens of Ireland then you wouldn't end up with what we've got. Nor would it cost so much - in fact, it would cost a great deal less. But governments don't do zero-based budgets. Instead they tend to take what they spent last year, then add a little (or a lot) for their plans and commitments this year, and subtract a little (though rarely a lot) for any spending or tax reductions they think they can implement this year. That's the Budget process in a nutshell.
This year the Government has been caught out by a) the global economic downturn and b) our very own, home grown recession. So it has had to come with an extra €2 billion in taxes (on top of what it was previously expecting), a process described as follows by the Minister for Finance in his Budget speech:
In the next year, close to €2 billion in tax revenue must be raised to keep within the fiscal targets set out earlier. If the current economic circumstances deteriorate, it may be necessary to make some equally difficult tax choices next year.
€2 billion is a very substantial amount of money to seek in any one year, but circumstances are such that there is no option. In raising this sum, the Government has been guided by three essential principles:
first, the imposition must be fair and equitable and at a higher rate for those on higher incomes;
second, the levies involved must be straightforward and readily collectible and
third, we must seek to protect sustainable production, employment and the economy in order to keep Ireland competitive in the global marketplace.
The Government is concerned that some of the more expensive tax reliefs, especially for the better off, should be scaled back and the resources used, as appropriate, to protect those taxpayers who are most vulnerable in these times. It is fair and reasonable that those who profited most from the recent good economic times should shoulder a commensurate burden as conditions worsen.
You understand, I'm sure, that 'those who profited most from the recent economic good times' is you and me. Not, of course, those civil servants who have enjoyed extraordinary rises in their pay and conditions, as well as the most generous public sector retirement packages in the world. Whilst private sector workers have seen their pension entitlements reduced to ash in the recent financial fire storm, public sector workers had theirs increase by 2.5% only last month (on top of all the previous increases).
Which is where I have a problem with all this guff about 'burden sharing' in the Minister's speech, and the smash and grab on people's salaries through the tax levy of 1-2% that he announced. The public sector's 'share' of the burden comes in the form of deferred pay rises; the private sector's comes in the form of unemployment. In the public sector, reality is optional. In effect the Minister has decided to outsource the recession - because he can. When a business gets into trouble the people who pay are the directors, employees and shareholders. When a government gets into trouble then everybody else pays.
I'm all for 'commensurate burden sharing' when the times require it, but after years of binge government I find it a bit rich to be told that we the nation's taxpayers are expected to hand over more of our increasingly hard earned incomes to the people who, more than most, got us into this mess in the first place.
What we need, as a sovereign people willing to share the burden, is to renegotiate the contract with the public sector, to end the insane tax-funded pension scheme they enjoy, and adopt the same hire and fire flexibility that is taken for granted in the private sector. In the words of Minister Lenihan, 'It is fair and reasonable that those who profited most from the recent good economic times should shoulder a commensurate burden as conditions worsen'. I entirely agree - let's start the negotiations.
Tuesday, October 14, 2008
Of course, these are desperate measures for desperate times, and most banks have accepted these offers they cannot refuse with varying degrees of gratitude. Except Barclays in the UK. But it is only the start, and if previous history of state-owned businesses is anything to go by then it won't be pretty. Here's Philip Johnston on the scenario facing the UK's Alistair Darling:
No doubt he wants the banks to operate as commercially as possible, but this is not how state industries work, and especially not when they are run by such a micro-managerial government of the sort we have today. The fact is that billions of pounds of taxpayers' money are now tied up in these ventures, as was the case in British Leyland and Rolls Royce many years ago; suddenly, decisions that were once for a board of directors to make become political. Seemingly trivial business matters are raised in the House of Commons. MPs are approached by constituents worried about their deposits or businesses wanting refinancing. Soon, ministers are accused of favouring firms in Labour constituencies over those in Tory-held seats. There is little point in Mr Darling saying ''it's nothing to do with me, guv". As far as the taxpayer is concerned, it is.The pressure is now on the Irish Government to follow suit: at least as far as the markets are concerned which lopped more value of AIB and Bank of Ireland yesterday. Indeed, the value of all Irish banking and financial institutions combined stood at less than €8.5 billion yesterday - my how the mighty have fallen!
But perhaps the Irish Government is wise to hold off on any decision to follow the examples of the US and UK for now. It may well be that these efforts elsewhere will have the desired effect, and the flow of interbank lending will pick up. Mind you this still has some way to go: the TED Spread indicator of interbank lending rates remains stuck at a record high level.
Still, the brave among us might take our cue from Willie Sutton and the world's governments and decide to get back into bank shares: it was round about now during the Great Depression that stocks started to pick up. Though I think I'll take my lead from the Irish Government and wait and see what happens next. I'm just not that brave.
Monday, October 13, 2008
The benefits of happyism in the workplace are dubious, as noted by Steve Salerno:
There is other evidence that a good attitude sometimes is bad for business. A University of Alberta psychology team studied multiple groups of workers assembling printed circuits and deemed the crankier employees superior to their upbeat counterparts. The grimacing workers threw themselves into their work -- and did it better: Unhappy workers made half as many mistakes as their cheerful counterparts. Studies also suggest that optimists are less vigilant about taking care of their health, less fastidious about safety protocols and less inclined to save money.Likewise the benefits of happyism as a focus of national policy have been well and truly challenged by economists such as Paul Ormerod. That said, the area of economics and happiness is a burgeoning one, as indicated in this guide to the field from the Geary Behaviour Centre.
In these recessionary times we can expect to hear a lot less about 'affluenza' and how stuff just makes us miserable. Instead we'll likely get to experience real misery, not the psychobabble version pedalled by the advocates of happyism. And maybe that won't be such a bad thing: as Eric Wilson puts it in this delightful essay In Praise of Melancholy:
To be against happiness is to embrace ecstasy. Incompleteness is a call to life. Fragmentation is freedom. The exhilaration of never knowing anything fully is that you can perpetually imagine sublimities beyond reason. On the margins of the known is the agile edge of existence. This is the rapture, burning slow, of finishing a book that can never be completed, a flawed and conflicted text, vexed as twilight.Or as he puts it elsewhere in his essay, the driving force behind happyism is fear: fear of life's contingency and uncertainty, its terrible beauty. A healthier outlook is to embrace the uncertainty, and the occasional melancholy that goes with it, for that way lies wisdom ... and the delight of unbidden happiness when it does come.
More important still is the realisation that it is the unhappy who bring about change - the happy are always content with the status quo. This is the central point of Julian Baggini's book on Complaint reviewed recently in the Financial Times.
So perhaps our current economic misery is precisely what we need: a spur to change what needs to be changed; aware, of course, that nothing in life is guaranteed - which makes it all the more wonderful for that.
Saturday, October 11, 2008
I know, it's a bit rich blaming those now 'upside down' with their mortgages when the bankers who loaned the money are getting bailed out by taxpayers on both sides of the Atlantic. But it's worth further consideration: what were people thinking when they took out sub-prime mortgages in the United States when they didn't even have a job or income to meet the repayments? We know what the people who loaned them the money were thinking: bonuses. But really: how did people think the biggest housing bubble in history was going to end - with a slow imperceptible hiss?
Even in Ireland you have to wonder about the expectations of those who took out the loans from the banks that were also funding the developers building the houses. Especially buy-to-let mortgages. As a recent and informative analysis of Ireland's housing bubble by the European Commission (pdf) points out:
The proportion of buy-to-let mortgages in total residential mortgages has been increasing over time, reaching 26% in 2007 and accounting for almost half of all new homes bought in the last two years. The rental market has expanded from 16% of total housing units in 2000 to 21% in 2006. The growth in the number of second or vacant dwellings has added to the boom in the housing sector. The share of vacant dwellings in total housing increased from 10.5% in 1996 to 16.7% in 2006. The biggest class of vacant habitable dwellings in the "other" category are dwellings held for investment purposes.So should the homeowners and private investors who bought at the peak be bailed out? Whether sub-prime in the US or buy-to-let in Ireland? If they're bailing out the banks then why not bail the borrowers? Of course this raises serious moral issues. After all, where does personal responsibility begin and end in relation to people's financial decisions? It isn't an easy one, as this debate over at the brilliant In Character journal illustrates. And will our methadone housing policies only make matters worse?
David Quinn sets out some interesting thoughts in yesterday's Irish Independent on the role of character in today's financial turmoil. Though he doesn't go far enough: yes, banks and politicians need to improve their character - but so also do borrowers (and not just in terms of their sexual behaviour as David has it). We all need to be morally responsible - not just the bankers, developers and politicians. As it was put recently in an op ed from the Acton Institute, morality and markets must go together, or else we'll have neither:
In short, we're learning the hard way that virtues like prudence, temperance, thrift, promise-keeping, honesty, and humility - not to mention a willingness not to do to others what we wouldn't want them to do to us - can't be optional-extras in communities that value economic freedom. If markets are going to work and appropriate limits on government power maintained, then society requires substantial reserves of moral capital.We have to be honest with others, but we also have to be honest with ourselves. As Charles Haughey once put it during an earlier economic crisis - quoting Walt Kelly - 'we have met the enemy, and the enemy is us'.
Friday, October 10, 2008
One thing seems clear though: the Irish Government's guarantee to Irish depositors looks unlikely to be the end of it. Both the UK and USA (and several other EU countries) have had to bite the bullet and take equity in major banks. So far the Irish Government has been lucky and hasn't had to pay out a cent in response to the current crisis. So far.
But the current extreme turbulence makes it inevitable that one or more Irish financial institutions will need re-capitalised with state/taxpayer funding. Mere anarchy is loosed upon the world ...
Thursday, October 9, 2008
Certainly falling oil prices are good for Ireland as we have the highest dependency on oil of any EU country for our energy. A shrinking economy also means that we use less oil - that'll keep those fretting about our carbon footprint happy. But we do seem to be experiencing many of the characteristics associated with the concept of Peak Oil. When the economy is going strong then oil prices rise, sometimes sharply. When the economy stalls and goes into reverse then oil prices tumble right back ... ready to start the cycle all over again when growth returns.
When faced with such uncertainty one of the most useful planning tools is that of scenarios. Which is why I recommend taking a look at the Future Scenarios site which examines the interplay between peak oil and climate change. I think we might be lucky and end up going through the GreenTech scenario (bottom left of chart). A depressed economic outlook will lead to a moderated pace of decline in global oil output over the next decade, while some of the (remaining) capital anxious to avoid dodgy investments like land and property (!) might find its way into energy innovation.
I recently met some of the folk from Better Place when they were in Dublin recently and certainly their initiative and those of several others point to a very exciting time for transport innovation here and elsewhere. Every cloud has a silver lining and all that.
Wednesday, October 8, 2008
The result: a sort of "What's Hot, What's Not" review for the next 2-3 weeks/months/years (he said optimistically ...)
Things we'll be hearing much more often:
'This is just like Nostradamus predicted ...'
'Cash only, bank drafts will be refused ...'
'Here's €5 now, I'll pay the rest later ...'
'We're saying prayers for an end to the recession soon, dear Lord ...'
'Special offer: buy one apartment, get one free ...'
'Closing down sale: everything must go, emigrating to Australia ...'
And the things we'll be hearing much less often:
'The biggest issue facing Ireland right now is climate change ...'
'Sorry, we're full up ...'
'Keep your job, I'm off to find myself ...'
'That's the price, take it or leave it ...'
'There has been a lot of interest in this property recently ...'
'Profits are at an all time high ...'
Meanwhile for a somewhat less flippant assessment of where things are check out this Merrill Lynch presentation (they used to be a Wall Street bank) via Stephen Kinsella. I love the line on slide 74: 'Fear and Greed are stronger than long term resolve'. Explains a lot that: though not nearly as much as slide 39, oh boy.
The extraordinary turbulence on the global stock markets, especially in relation to financial stocks, is unprecedented in my experience (which goes right back to the late 1970s in terms of grown-up awareness of what was happening to the world around me). Jeff Randall writes in today's Telegraph about 'The Ninety Percent Club' - those institutions and corporations that have seen their share prices fall by 90% or more since their peak. RBS joined their ranks yesterday. The speed and depth of such declines has many uncomfortable parallels with 1929 and its aftermath.
Randall also points out that the Dow Jones fell by 89% from its peak in 1929 to its trough in 1932 - and took twenty years to recover. As of yesterday, the ISEQ was down 70% from its peak just over 19 months ago. Irish financial stocks have already fallen by over 80%. I wonder can you have a Depression in one country ...?
Still, we might be lucky and have a 'good depression' as The Economist portrayed the UK's experience of the 1930s recently. Though Irish history paints a much less benign story of the same period. If you can short Irish economic forecasts then now might be a time to place your bets ...
Tuesday, October 7, 2008
At this point all options are on the table. The negative turn in the markets after last week's bailout in the United States suggests that other options have to be considered - and soon. Indeed, the $700 billion rescue package in the US may yet come unstuck as its original three pages of focused simplicity morphed over two weeks into a hideous 451 page bandwagon of the worst excesses of pork barrel politics. The Bailout of Abominations as Robert Higgs has called.
At least our own policy makers were more concise with their rescue of Irish banks last week - just 10 pages make up the Credit Institutions (Financial Support) Bill 2008 (pdf). One of the most interesting clauses to my mind is 6(9) on page 5:
The Minister may subscribe for, take an allotment of or purchase shares and any other securities in a credit institution or subsidiary to which financial support is provided under this section on such terms as the Minister sees fit.In other words, he has the option to take a share (up to 100%?) in the banks on his terms and at his discretion at any stage in the next 2 years. Boy the banks must have been in a bad place to agree to that ...
But will it work? That's the €400 billion question of course. Mind you, our own difficulties are small stuff compared to the nuclear option about to be implemented by the world's central banks. Let's hope it works. Though I seem to recall it didn't in the movie. Better have Will Smith on speed dial, just in case.
Monday, October 6, 2008
The welfare of the children is assumed to derive from this objective (higher family incomes/less poverty) but it is clearly not the main objective. Ireland does not fare well in the study, and the implication in the analysis - as shown in the chart - is that Irish mothers pre-school age children are substantially less likely to be employed than their counterparts elsewhere. Ireland is closer to the UK in that regard, though not entirely.
One major difference from the UK, I suspect, is that we have not yet fallen victim to what has been called Fertility Correctness. In a fascinating essay (pdf) for Civitas by Colin Brazier, the writer notes the growing anti-large family bias now emerging and the consequence fall in 'sibship', i.e.: the experience of having brothers and/or sisters:
Familial relativism has parallels with cultural relativism. The drift towards low sibship as an expression of ‘fertility-correctness’ is perpetuated and augmented by fashion. The power of the norm is highly seductive for parents who want to experience parenting without enduring a decades long ‘parenting emergency’. Some developed countries now, arguably, have a one-child policy by example, not compulsion.As Brazier concludes, fertility correctness is really a war on the middle-classes:
There might even be similarities with multiculturalism. True egalitarianism is vexingly difficult to achieve; witness the current woes of the white working class. Equally, the pretence that no family size is more equal than another is precarious. Population politics are a zero-sum game: a dominant one-child philosophy is emerging, to the effective disadvantage of the old favourite.
Choice has become increasingly Hobsonian for middle-income earners. The only child—once pitiable—is now fashionable. A growing canon of work exists to justify the decision to restrict family size in the interests of the environment or career. Respectable authors sidestep a substantial body of evidence to argue that only children suffer no material disadvantage by dint of their solitary status. In place of the large family they cannot have or do not want, parents of singletons incorporate nephews, nieces, Godchildren, and the children of friends into the ‘analogue family’ unit. Those denying that children of low sibship are in any way disadvantaged are the intellectual midwives to a new demographic order: ‘A world never before inhabited: a world in which the only biological relatives for many people—perhaps mostWhich makes me wonder about targets for childcare for pre-school age children. We need to get serious about the wellbeing of our children, not least because half of all the variance in lifetime income between people is determined by age 18. But that doesn't necessarily mean increased participation in the workforce for mothers of pre-school age children. An alternative solution is to take the €2.5 billion spent this year alone on Child Benefit and focus it entirely on married couples with pre-school age children where either parent has had to give up employment.
people—will be ancestors.’
That way you remove the need for state-funded childcare facilities; incentivise parents to have larger families than they could otherwise afford; reinforce the strength of family life; ensure our population continues to grow; and reduce income inequality in the long term. A pretty compelling case I would have thought - and one where an Irish solution to an Irish problem might actually be a good thing for a change.
Sunday, October 5, 2008
More evidence, I guess, of Clay Shirky's cognitive surplus and the new era of 'publish then edit' now replacing the old one of 'edit then publish'.
Saturday, October 4, 2008
Robert Reich puts it well in his assessment of the crisis on Wall Street:
The Street has suffered a serious decline in trust. Yet trust is its most important asset. Financial markets trade in promises -- that assets have a certain value, that numbers on a balance sheet are accurate, that a loan carries a limited risk. If investors stop trusting those promises, Wall Street can't function.Irish bankers have presided over the loss of approximately 80% of the value of financial stocks since their peak on 21st February 2007. That's a lot of ground to make up before we're even back to square one. No wonder the Irish Association of Pension Funds is warning about a possible collapse in some defined benefit pension funds. I can't see us getting back to the peak for a decade or more (in real terms: runaway inflation might get us there sooner in nominal terms). In my more pessimistic moments I think it might take a generation.
But in the last few years, many Wall Street promises have not been worth the paper they're written on. That's because, when the securities market was roaring, many financial players had no idea what they were buying or selling, and worse, they didn't care. Derivatives on derivatives; so-called special investment vehicles to move assets off balance sheets; credit default swaps; and of course securities backed by risky home loans. There seemed no limit to the financial smoke and mirrors. That meant almost no limit to what was promised. And regulators looked the other way.
It worked great as long as everyone kept trusting and the market kept roaring. But all it took was a few broken promises for the whole system to break down. What to do? Not to socialize capitalism, as is now being done. What's lacking isn't capital, it's trust. And the only way to rebuild trust is through regulations that require financial players to stand behind their promises and tell the truth, along with strict oversight to make sure they do.
Recovery requires (re)building trust. But that is far more difficult when trust has been lost than when it wasn't there in the first place. There's an interesting debate about trust in society on the usually fascinating Thinking Allowed series on BBC Radio 4. Onora O'Neill (no relation!) and Mark Kohn discuss the lack of trust in various public representatives, including politicians and bankers. The interview took place in July, I'm guessing bankers might come off even worse in light of recent events. Kohn makes the point that game simulations of trust show that the best strategy is, in the first instance, to assume that the other party to an interaction is trustworthy and will reciprocate any positive gesture. But if the other party fails to reciprocate then there is no trust and the outcome is much worse (and harder to reverse) than if trust had been built at the start.
There is now a growing body of research about the role of trust in economic and societal progress. For example, a recent paper from ZEW (pdf) examines the impact of trust on reforms in different countries and finds that:
... in high-trust environments it is easier to agree on (in the long run) welfare enhancing reforms. Among the theoretical arguments which lead to this conclusion are the reduction of information decits due to a higher level of information attained by individuals in high-trust societies, the moderation of conflicts regarding the wealth distribution in environments of high trust, and the possibility to make credible promises for compensation of reform losers.And as a recent DB Research report (from which the chart above) shows, there is a strong correlation between levels of trust in society and numerous other indices, including freedom, the health of democractic institutions, economic growth and innovation levels.
Recovering from the current crisis, and restoring the wealth of Irish citizens in general and Irish pension holders in particular, will require sustained, deliberate efforts to build trust. Efforts on the part of our bankers to be sure, but also on the part of our politicians, journalists and regulators. Unfortunately all the evidence is that it takes longer to regain trust than to lose it in the first place. So better get started ...