Camino Calling

I'm off walking the Camino de Santiago for a week from tomorrow. So posting will be light (to non-existent) for a while.

Adiós!

A Big Future for History

I bid on a few lots at the Adams 'Independence' auction earlier this week. I got the two things I was keenest to get: an original Ulster Solemn League and Covenant parchment, and a copy of the Irish War News. The former was signed on Ulster Day, Saturday 28th September 1912 by William James Ward at the City Hall in Belfast. The lot also included a Ladies Covenant (to my shame, I wasn't aware there was such a thing), signed at Fishwick Church in Belfast by Ruby Kathleen Rhind on the same day. The Irish War News, on the other hand, was published on Tuesday, April 25th 1916 by the Rebels then less than twenty four hours into their occupation of the GPO and other sites around Dublin. On the back it reads: At the moment of writing this report (9.30am, Tuesday) the Republican forces hold all their positions and the British forces have nowhere broken through. The rest, as they say, was history.

I have an equal opportunity interest in Irish history, and I don't think I'm alone. Certainly to judge by the high level of interest in the Adams auction. Today is World Book Day, and to coincide with it my company has published some survey findings on book reading. Book reading seems to be in a healthy state in Ireland (7 in 10 adults have read a book in the past 3 months). There's also a high level of interest in books about Irish history and Irish current affairs - as the chart below shows, a quarter of all Irish book readers have read a book about Irish history in the past twelve months. Just under a fifth have read a book about Irish current affairs.



Interest in Irish history peaks among male, 45-54 year olds (my own demographic). I suspect that it's a lifestage thing: as you see your own children become adults you become much more conscious of your own history as you think back to your world when you became an adult. And how much it has changed since. Hence the interest in history books.

I predict that the combination of Ireland's middle-ageing population and the decade of centenaries that will gather momentum after Ulster Day 2012 will provide a massive boost to demand. I see a big future for history.

Coase-ting to a Halt

Institutions will try to preserve the problem to which they are the solution. Clay Shirky

That's one of those insights that increasingly seems to be confirmed everywhere I look. NAMA, Anglo Irish Bank... the Irish Government. Even Social Partnership, as the wheels threaten to come off the latest, negotiated settlement between the Government and the representatives of (most of) its employees. Kevin Kelly applies the Shirky Principle to trade unions thus:

Unions were a brilliant solution to the problem of capital management which tended to exploit uncapitalized workers. But over time as capital increased in complexity, unions complexified as well, until unions needed management. The two became one system -- union/management. So now the problem with unions is that they are locked into the old framework, the old system. They inadvertently perpetuate the continuation of the problem (management) they are the solution to because as long as unions exists, companies feel they need management to offset them, and so the two became co-dependent. In effect problems and solutions tend become a single system.

But I think there's a logical corollary of the Shirky Principle, namely that preserving the problem ultimately destroys the institution. Take sovereign debt: the IMF is warning us that:

...the biggest threats have moved from the private to the public sectors in advanced economies. Governments not only took on many of the bad assets from private institutions but due to the recession face continuing heavy borrowing needs for the next few years. Slow growth in the real economy and high unemployment will retard tax revenues and require higher government spending—such as on unemployment benefits and job creation activities.

So governments - including Ireland's - are on the hook for the debts arising from their efforts to solve the problem of an imploding banking system. But David Goldman sees a bigger problem down the track in the United States:

In the new corporatism, where governments bail out banks and banks bail out the government, the question continuously arises: who’s the senior partner in the merger?

The government bailed out the banks, of course. The banks are now financing the deficits of governments... Now, let me see–do I have enough fingers and toes to work this one out?–the governments are issuing gigantic amounts of debt to bail out the banks. The banks are making money levering up this debt, so it looks like there’s no more problem in the financial system. So to reduce the debt of governments, we should tax the banks’ balance sheet, which have ballooned as the banks bought government debt with zero-interest financing from the government, and made lots of profits…

The spat over Richie Boucher's pension is but a mere foretaste of what is to come: imagine the media reaction when the Irish banks start reporting large and growing profits? Now I've nothing against banks making profits (by being banks, not property-addicted pawnbrokers), but I suspect that that'll be a hard one for Irish taxpayers (and borrowers and mortgagees) to swallow. So the government's solution to the problem will have created another problem...

Like I said before whilst reflecting on Shirky's insights, we may be on the cusp of the Coasean demise of the state, and not just in Ireland. I don't doubt we'll come up with new and better institutions to solve the different problems we will face, but nor do I doubt that the transition will be a messy and difficult one. Twas ever thus.

Sink or Surf

We are much more vulnerable now than we were during the Second World War. When I grew up we had the skills to be self-sufficient; we made our own clothes and fished, we never felt poor. Now you don’t need a nuclear bomb to finish off a country; you just cut the power off for a week. Harry Eyres

Will the internet save us from the next global disaster? That's the fascinating thesis put forward by David Eagleman. He has featured once or twice in previous posts - he's always guaranteed to challenge your thinking. David's talk at the Long Now Seminar series identifies six easy steps to avert the collapse of civilisation. A noble ambition. They range from 'trying not to cough on one another' to 'mitigating tyranny'. All his steps have one thing in common: the ubiquity of the internet and its capacity for distributed productivity, learning and knowledge storage.

Ultimately his is an optimistic take on future - as the internet of things (e.g.: tsunami detecting systems) merges with the internet of people (e.g.: twitter) then early warnings will get earlier. No more Pompeiis. That's the theory anyway.

But I think he's right. We can be 'strategically optimistic' about the future - to borrow a phrase from the Boston Consulting Group - because we now have the tools, knowledge and people to respond more effectively and more intelligently to the challenges we will face. Yes, our increasingly complex civilisation is more vulnerable because of its interconnectivity, as the quote at the top notes. But it is that richness of connection, and the redundancy that it affords in the event a sub-set of connections fail, that will ultimately enable us to avert collapse.
Liking using Skype when a volcano stops you flying.

No island is truly an island any more. Especially an advanced island economy like Ireland. Surf's up.

Volcanic Assumptions

I blame the Old Testament. The book of Ecclesiastes to be precise. Every year the media latches on to something that says "we're all going to die". Last year it was the Aporkalypse, this year it's a modest, albeit inconvenient volcanic eruption. But that hasn't stopped some extrapolating from cancelled flights to economic collapse.

Now don't get me wrong: I'm well aware that nature owns the stage on which we all get to play our parts, and nature decides when the curtain falls. But in the meantime ...

The Patriot Blame

Violence, naked force, has settled more issues in history than has any other factor, and the contrary opinion is wishful thinking at its worst. Nations and peoples who forget this basic truth have always paid for it with their lives and freedoms. Robert A. Heinlein

We have an awkward relationship with violence here in Ireland. Very awkward. The Irish state came into existence through acts of violence - as did almost every other democracy in the world. But like all democracies arising from the violent actions of unelected and/or unrepresentative perpetrators we quickly adopt Max Weber's nostrum that the modern state's authority rests on the monopoly of violence - and should remain so. And not just democracies: the graph (from information is beautiful) shows the shockingly high share of GDP comprising military spending in delightful places like Myanmar, Saudi Arabia and Kyrgyzstan).

But that monopoly gets challenged from time-to-time. Right now in the Western world the main challenger is al-Qaeda, as Christopher Caldwell explains, referencing the cartoon controversy in Denmark:

In matters of free speech about religion in Denmark, the government monopoly on violence has been broken. There is another player in the market, declaring that cartoons perceived as anti-Islamic are punishable by death. A pattern of political violence against ordinary citizens is something western Europe has not experienced in more than half a century. Some people describe radical Islam as a kind of totalitarianism, or “Islamofascism”. That is an oversimplification. Even if he had contact with al-Qaeda, Mr Westergaard’s would-be assassin was probably working as an individual.

But this power to intimidate, though informal, is potentially decisive. It is the same power exercised by those who threaten journalists in Russia, those who kill policemen in Mexico, or the Ku Klux Klan in the US south of a century ago. Such acts make law. It is remarkable how few people they have to harm to do so. Lars Løkke Rasmussen, the Danish prime minister, was not just mouthing a cliché when he described the attack on Mr Westergaard as “an attack on our open society”. Once a competing source of predictable violence emerges in an open society, government must do something to stop it.

Here in Ireland we have our own 'competing source of predictable violence'. This week's attack by the Real IRA on MI5's headquarters in Northern Ireland was a powerful reminder of that fact (that's if you can call holding a taxi driver's family hostage, threatening to kill them and forcing him to drive the bomb to the target an 'attack'). Of course, republican violence in Ireland has had a very long history - and was instrumental in the foundation of the Free State. The Real IRA and their supporters would therefore claim to be the latest in a long line of those who have used violence for political ends.

Their claim is flawed at several levels. In his book States of Mind, Oliver MacDonagh described the different stages that shaped the development of the ideology of violence in Ireland:

From the agrarian societies of the eighteenth century came the general habituation to the use of force and conspiracy, and the concepts of alternative law and rule. From Tone derived the clear expression of the dogmas that the British connection was the unfailing source of Ireland's ills, and that 'Protestant, Catholic and Dissenter' was a false distinction, employed by the imperial power to divide Irishmen, for their better subjugation. Tone also contributed the notion of the Republic (especially epitomised by its Army, the repository of civic virtue and authority), and in general fathered the movement's totalitarian strain. From the Young Irelanders came the first the definitive association of cultural separation, mass education and popular literature with the cause of violence. To them too we must attribute the first clear linkage of political virility and the use of arms. From Fenianism came the assertion that Ireland was in a constant state of war with Britain, as well as the assumption of governmental rights by the Irish military arm which was committed to the struggle. It was Fenianism moreover which developed the strategy of manipulating Irish opinion by evocative demonstrations and the tactic of infiltrating and deploying exterior organisations. From Pearse came the 'religion' of violent nationalism, the cults of blood, youth and sacrifice, and the concepts of generation witness, historic roles and supremacy of the gesture.

Each of these stages was in turn shaped by forces as diverse as political philosophy, imperial power struggles, and even rising affluence and literacy - in Ireland and abroad. Especially the 'supreme gesture' of the 1916 Rising. But these historical forces have long since given way to other, more contemporaneous ones. And the most fundamental one is that on 23rd May 1998 the majority of Irish people in the Republic of Ireland and in Northern Ireland approved the Belfast Agreement and its core principle of democratic consent to future changes to the political structures on this island. Today the factors that McDonagh described as shaping the ideology of violence in Ireland no longer pertain. All we are left with are the Real IRA and the 'supremacy of the gesture'. Like last Monday's car bomb. Gestures that certainly demonstrate the existence of the perpetrators but which have no prospect of achieving any political change simply because the conditions are no longer those that can be shaped by violence as in the past.

So why do the Real IRA, al-Qaeda and other terrorist groups persist? Do they think that they can ultimately secure political gains otherwise withheld by those they attack? An analysis by Max Abrahms suggests that this is the wrong question. As he points out, modern day terrorists:

(1) attack civilians, a policy that has a lousy track record of convincing those civilians to give the terrorists what they want; (2) treat terrorism as a first resort, not a last resort, failing to embrace nonviolent alternatives like elections; (3) don't compromise with their target country, even when those compromises are in their best interest politically; (4) have protean political platforms, which regularly, and sometimes radically, change; (5) often engage in anonymous attacks, which precludes the target countries making political concessions to them; (6) regularly attack other terrorist groups with the same political platform; and (7) resist disbanding, even when they consistently fail to achieve their political objectives or when their stated political objectives have been achieved.

Sounds familiar. So why persist? Abrahms thinks people turn to terrorism for social solidarity - like joining a street gang. It might seem a somewhat fatuous explanation, but a recent study by Demos - The Edge of Violence - was based on interviews with convicted Muslim terrorists and non-violent radicals and observed that:

Terrorists, radicals and young Muslims had all experienced some degree of societal exclusion, had a distrust of government, a hatred for foreign policy, many felt a disconnection from their local community, and many have had an identity crisis of sorts. Of particular note was a high level of distrust among young Muslims towards policing and intelligence agencies, with obvious implications for counter-radicalisation efforts.

...The spread and acceptance of radical or violent ideas can be helpfully conceived as a social epidemic, because whether an individual comes to accept such ideas depends on how far their peers do and the extent to which they are seen as worthy of imitation. An increasingly important part of al-Qaeda’s appeal in the West is its dangerous, romantic and counter-cultural characteristics.

Thus much of the momentum behind persistent problems of terrorism (when objective factors such as repression and occupation do not pertain) is the problem of disaffected young men who feel increasingly alienated from the society they live in. As the drug gang related violence in our cities shows, once you create the conditions for 'competing sources of violence' to emerge, then it's very hard to win the competition in a democracy.

This is yet another reason to give our young men - on both sides of Ireland's border - a deep sense of investment in their society in the form of jobs, wives and children. For the sake of our democracy, and our freedom.

Losing a Generation

It's no consolation to our unemployed young men, but it could be worse. They could be living in Sweden. According to the OECD (see chart), the unemployment rate for 15-24 year old men in Ireland is just over twice that for all men of working age. In Sweden it's a ratio of four to one. A case of gender feminism overshooting the equality target perhaps?

But what is to be done? Ireland's approach is the tried and trusted one of ignoring the problem and hoping it will go away. Which will leave us looking like the gender equivalent of a mirror image of China as Ronan Lyons sees it.

The OECD itself is challenging member countries to avoid a situation whereby our economies lose an entire generation of young people to the labour market and hence to future economic output (and the consequences will go far beyond the economy). Worse, as the ESRI pointed out recently, if young people - especially young men - leave school too early because of despondency about future job prospects then they chances of them making up for lost ground later will be tiny.

Education is key. Especially training in skills that are best delivered outside of traditional third level structures. But that will take time - and we don't have enough time to arrest the disaster now unfolding for a generation of young European men. Which is why we need to pull on all the relevant economic levers: suspending the minimum wage, getting rid of employers' PRSI and workfare for able bodied young men and women in receipt of social welfare payments.

Unfortunately only politicians can make this happen. But if they do, employers and entrepreneurs will do their bit to stop the damage to our youth before it's too late.

Can We Swap Anglo for Greece?

It's just a thought. If Anglo Irish Bank is on a mission to bail out the nation's troubled businesses - like the Quinn Group - with our taxes then why stop there? In fact, let's cut to the chase: let's use our taxes to bail out an entire country. I'm talking about Greece of course.

Better still: rather than using Anglo to buy Greece, why not do a swap? The various numbers being bandied about to bail out both institutions seem more or less even. So they would get some prime sites in Cavan etc and we would get the home of Socrates and Aristotle, not to mention some really nice islands with a somewhat different weather pattern to our own blessed island. We could even sell it to the Irish taxpayer as a kind of time share deal for the nation.

It's just a thought...

Deliver This Day Our Daily Nudge

Behavioural economics is in danger of misbehaving. It seems to be everywhere right now: Obama has a team of behavioural economists helping nudge the America people towards utopia, and instead of product placements on the telly we now have 'behavioural placements'. Behavioural economics is fast becoming the predator drone (or Unmanned Aerial Vehicle - UAV) of policy making: it promises targeted interventions that do no harm to the operator nor to the wider community whilst only affecting misbehaving individuals (though without the, er, stinger missiles).

What's to worry about? There's a vigorous debate over at Cato Unbound this month which debates whether the soft glove of libertarian paternalism is just a slippery slope away from the iron fist of illiberal paternalism. My gut says 'yes', but my head says 'let's test it and review the data'. But there's more to my gut concerns than slippery slopes. My fear is that behavioural economics (which continues to provide many fascinating insights into human behaviour) will pander to the perennial ambition of all politicians to keep on improving things, even when things are best left alone - the problem of 'relentless reformers' as Chris Dillow describes New Labour. Pretty soon we'll all find ourselves targeted for behavioural change - for our own good, of course.

But maybe I'm just being paranoid. Sure that's like saying all those UAVs used for killing alleged terrorists in Afghanistan will end up being used to police ordinary citizens in our cities. And that will never happen...

What have immigrants ever done for us?

The killing last week of Toyosi Shittabbey in Tyrrelstown has inevitably provoked much soul-searching about the nature of race relations in Ireland and the wider issue of immigration. Yet the reality is that immigration isn't a concern for most people in Ireland: only 2% in a recent survey thought it one of the two most important issues facing Ireland at the moment (compared to 9% across the EU27 as a whole and 29% next door in the UK).

Why is that? The most obvious reason is that Ireland's very recent experience of immigration coincided with an unprecedented economic boom in which immigrants were seen as filling jobs that would not otherwise be filled. Add to that the obvious fact that such immigrants were, overwhelmingly, white Europeans from culturally Christian countries then it followed that the potential for racial or religious conflict with immigrants (and/or its manipulation by indigenous politicians) was minimised. In marked contrast, the UK has had a very different pattern and experience of immigration, hence the greater level of concern there about the issue. Indeed the remarkable thing is how little antipathy there has been to immigrants even as the boom that brought most of them here has turned to bust: there have been no demands for Irish jobs for Irish workers.

However, it would be naive to think that Ireland has been spared any negative social and political consequences from immigration. The ghettoisation of asylum-seekers in specific locations, coupled with restrictions on their right to take up employment, seems designed to create the potential for racial and religious conflict with the indigenous Irish population in the same catchment areas. Add to the mix the fact that asylum-seekers are overwhelmingly non-white and from cultures other than Christian (e.g.: Nigerians and Pakistanis made up 3 in 10 asylum-seekers in 2009 according to the Office of the Refugees Applications Commissioner), and that potential is heightened further, especially when the catchment areas themselves are subject to worse than average economic conditions.

A number of things will mitigate such potential conflicts. Giving asylum-seekers the right to work if jobs are available might help (one of the few sensible ideas proposed by Social Justice Ireland in their recent report, but heh, credit where credit is due). Moreover, the collapse in the number of refugees applying for asylum in recent years (and the even greater collapse in the number of applications subsequently approved) has certainly assuaged any concerns about the country being 'flooded' by immigrants, or of Ireland been seen as a 'soft touch' in such matters.

The view on Ireland's experience of immigration that I have seen in surveys and focus groups with Irish people can be paraphrased as: "we're happy enough with all the immigrants we've had to date, we needed them after all, but we don't want any more for now thank you, especially with the economy in the state it's in". Though it might be tempting to dismiss such views as "really an expression of fear of things as important, or maybe as trivial, as unfamiliar food and hearing languages we do not understand" (to quote Ferdinand von Prondzynski in an interesting post), I think this is to 'trivialise' the very real tensions that can and do exist between immigrants and the indigenous population in almost every country. Let me quote Robert Putnam again:

It would be unfortunate if a politically correct progressivism were to deny the reality of the challenge to social solidarity posed by diversity. It would be equally unfortunate if an ahistorical and ethnocentric conservatism were to deny that addressing that challenge is both feasible and desirable. Max Weber instructed would-be political leaders nearly a century ago that ‘Politics is a slow boring of hard boards.’ The task of becoming comfortable with diversity will not be easy or quick, but it will be speeded by our collective efforts and in the end well worth the effort.

It is worth repeating Conor Cruise O'Brien's observation that 'there are no Irish aborigines': we are all of us descended from immigrants via one lineage or another. I suspect that being an immigrant in Ireland has never been easy, but the best - such as Phil Lynott - overcame multiple disadvantages to the inspiration of many others. As I see it, assimilation is best accomplished by enhancing the native culture and society with the energies and complementary values of each new wave of immigrants - creating a better Ireland in the process (in the eyes of both the indigenous population and the newly assimilated one). The trick, of course, is to have an immigration policy that enables this to happen.

We're not there yet: but if the tragedy in Tyrrelstown enables a more rational debate about such matters then perhaps some good will come from an evil act.

Banksy Does Blackrock

Spotted just off Blackrock Main Street this morning. He's getting closer...

Where Will The Jobs Come From?

I got to participate in 'The Economic Debate' in Google yesterday, chaired by David McWilliams. The debaters included Colm McCarthy, John Fitzgerald, Ronan Lyons, Alan Dukes and myself. It was a fascinating discussion, thanks especially to our host Google VP John Herlihy, who had the idea for the debate in the first place.

We had some great questions from the audience, and one towards the end got me thinking: where will the new jobs come? As you can see from the chart, something interesting is going on in relation to our unemployment rate: it seems to have levelled off, and it certainly is no longer on a trajectory to bring us back to the levels we saw in the 1980s and early 1990s.

Why is this? Part of the answer is the fact that a lot of people who lost their jobs didn't go on the Live Register: they left the country instead. But I think there's more to it than that. Firstly, the composition of jobs today is different to that in the 1980s: back then it was mostly manufacturing and some services with a residual of agriculture. Nowadays it's mostly services and some manufacturing and an even smaller contribution from agriculture. But the services jobs aren't all in Google and the likes: instead they're mostly in your local coffee shop and newsagent. And the one thing that's different about services compared to manufacturing is that increasing output in the former requires you to hire more staff a lot sooner than increasing output in the latter (which usually means more machinery first).

For that reason, I suspect we will see a bounce back in employment (and resultant fall in the live register) a lot sooner than many are factoring into their forecasts right now. Sure, the unemployment rate lags recovery: employers try to get more out of existing staff before taking the risk of hiring new staff. But like I said, when our economy is driven more by services than by manufacturing, the elasticity of demand for labour will be a lot higher than it was back in the 1980s and 1990s. So the lag will be a lot shorter.

So in answer to the question: the jobs will come from a lot of the same places they were coming from before the recession - hospitality services, retailing and some professional services. It won't mean a return to the heady levels of employment in construction and ancillary services (that'll take a generation or three), but it will mean more jobs, and more than expected sooner than expected.

Alimony Without Matrimony

Finally, finally there's a dawning realisation about the society-wide consequences of the Civil Partnership Bill. Just a month or so before it becomes law. I've only been shouting about it since last August. Still, better late than never... Even the Irish Times is starting to fret about potential, unforeseen consequences.

But I'm still perplexed about the rationale for the bill: those in favour seem to be saying that we need a legal arrangement that protects people in long term relationships who get left 'holding the baby' when their partners leave. Em, don't we have such an arrangement already? It's called marriage.

So the justifications for the cohabitation clauses in the bill are a diversion. What then is the real reason for the bill (aside from the same-sex couples issue which will only impact on a tiny minority of people)? I don't think it's just a cynical exercise in creating more work for lawyers (the Law Reform Commission who proposed the legislation would never do that surely). So what is it? My guess is that it's another measure of the increasingly misandryst culture in Ireland and elsewhere which wishes to reduce men to an inferior status in society. Feminism is no longer about equality, it's about payback. For as night follows day, the one left holding the baby will be a woman, and the vast majority of those seeking to end long-term, cohabiting relationships will be... women.

Right now the only way to get alimony is through matrimony. The Civil Partnership Bill and its sponsors are hoping to remove that inconvenience.

Music of the Spheres

Okay, I admit it, I'm a sucker for this kind of stuff (click on image):



ht: The Long Now Blog

Loanless Growth

We've all heard of 'jobless growth', but what about 'loanless growth'? That seems to be the scenario we are facing - the Minister for Finance and the banks' best intentions to the contrary. Take Wednesday's Central Bank data on household and business (non-financials) credit growth: as the chart shows, the rate of decline in lending is actually accelerating...

What's going on? According to the Minister's speech on Gloomy Tuesday:

The actions I have announced today will put the banks in a much stronger position than before. I am imposing specific lending targets on AIB and Bank of Ireland. They will make available for targeted lending not less than €3 billion each for new or increased credit facilities to SMEs in both 2010 and 2011. This in particular must include funds for working capital for businesses. This will be a significant increase on the figures reported by the banks for 2009 and will help to sustain the economy and foster growth. This figure will be reviewed as the needs of the economy change.

Bank of Ireland and AIB must also make available €20 million each for Seed Capital to be provided to supported ventures, building on the very successful programme launched in 2009.They will each set up a fund of up to €100 million for Environmental, Clean Energy and Innovation projects. This is in addition to the €100 million provided under the recapitalisation last year.

Yesterday saw the launch of the Credit Review Office, a kind of 'Banking Appeals Tribunal' equivalent to the Employment Appeals Tribunal - for disgruntled SMEs. Its purpose is to 'provide a process to review decisions by the participating banks to refuse, reduce or withdraw credit facilities.' I find all this very disturbing, and not because I don't think the banks have reduced their lending to businesses - plainly they have (or more to the point have had to because of the consequences of their previous behaviour for their liquidity ratios etc).

But such initiatives fly in the face of the economic reality facing Irish businesses - it's now very expensive and very risky to borrow in this country: even if the funds are available. The chart below shows the trend in the real rate of interest in Ireland (3 month euribor minus the harmonised index of consumer prices in Ireland) - thanks to deflation we now have the highest real interest rate for borrowers in the eurozone:



Obviously the rates charged on loans to SMEs are several percentage points above euribor, but it provides the basis on which banks determine variable rate loans etc. Not surprisingly, the trend in the real rate of growth in borrowing by businesses is strongly influenced by the real interest rate as the next chart shows:



So it's all very well cajoling the banks to lend, but what if businesses don't want to borrow? In a balance sheet recession, profit maximization gives way to debt minimization as the rationale for business behaviour.

My main concern now is the potential for an extraordinary degree of micro-managing of the banks by politicians and civil servants. It isn't just the Credit Review Office that indicates the likely involvement in day-to-day banking activities. This also from the Minister's speech:

I am requiring the banks to:
- commit resources to work with Enterprise Ireland and the IBF to develop sectoral expertise in the modern growth sectors of the Irish economy;
- explore with Enterprise Ireland and the IBF how best to develop the range of banking services that Irish SMEs trading internationally will need; and
- develop expertise and bring forward new credit products in areas where cashflow, rather than property or assets, is the basis for business lending

In other words, he is demanding the banks do the things they should do anyway (and used to do before becoming property pawnbrokers). We'll see how that works.

In the meantime Irish businesses will focus on growing their businesses using available resources, managing their cash flow and by negotiating lower prices for inputs - including labour. We'll probably also see a lot more 'angel finance' and DIY-loan syndication as hyper-cautious businesses steer clear of very expensive bank lending: whatever the Credit Review Office might do for them.

It'll be growth all right - but not as we know it.

Analogy of the Year Award

The winner of the Turbulence Ahead Analogy of the Year Award goes to Peter Bacon for:

Anglo Irish Bank is the Celtic Chernobyl

Easily the best (and scariest) analogy we have come across in a long, long time.

(ht Slugger O'Toole)