Standards are poor?

In recent weeks the Irish government has become very much preoccupied in reversing the decision by the major credit rating agencies Moody’s, Standard & Poor’s and Fitch’s Ratings to downgrade Ireland’s credit rating from the prestigious AAA. According to official sources the triple A rating is bestowed upon securities considered the lowest risk to investors, and, unfortunately given the current state of the public finances and banking crisis , Ireland is no longer considered a “low risk” destination for capital. Here’s the question though, why should the Irish government be so preoccupied with the opinion of those that have gotten things so wrong lately?

The criticism of the rate agencies needs to begin by examining the role they played over the past decade. During the 1990s the rating agencies had two ongoing problems. Firstly, how could they encourage more investment in financial products? Secondly how could they solve the continuing problem that mortgage banks faced in having to wait decades to recoup finance granted to new home owners? By marrying these two issues a single solution began to emerge to the two separate problems.

The rate agencies found that investors were always keen to invest in low risk securities. Therefore by bundling hundreds of mortgages into a single security and granting it a AAA rating the rating agencies solved problem one. Investors did not need to know what properties were in the bundle only that the rating agencies had granted it a AAA rating – and the capital flooded in! Mortgage banks were delighted as they could sell their loans into these securitized bundles and get a much quicker return on their original investment thanks to global investors who couldn’t get enough of these “safe bets” – hey presto, problem two sorted!

A new problem has emerged however as a conflict of interest has arisen. The rate agencies have become the gatekeepers and effectively took over the role of the banking sector in monitoring investments instead of fulfilling their original role as impartial observers. This is probably why these same agencies believed sub-prime mortgages were of low risk on the shortly before the credit crunch and why Ireland was deemed to be in “good shape” on the eve of the global financial crisis. The oligopolistic nature of this three firm dominated market calls very much into question the practices of these firms. One needs to question now maybe it should be Ireland rating these agencies and not the other way around!

The natural order of things

An interesting article applying the logic of Darwin's biological framework to the dismal science and beyond..

http://www.spectator.co.uk/the-magazine/features/3213246/the-natural-order-of-things.thtml

All you need, when you need it

Whether it be 'Mac the knifes' cutting budgets, low end corporate tax rates, industrial incentives attracting FDI, demographics and gateway attributes, E.U funding or our plain old educated workforce the explanations for the Celtic Tiger remain as puzzling and endless as the bundle of reasons that depict our current economic performance. Is it a case of better to have loved and lost than never have loved at all or should we spare the morals and seek a firmer footing on which to re-launch our economy.

Analysing Celtic Tiger literature, the 'convenience factor' emanates frequently. Just as we should oppose the tendency to feel sorry for poor little Ireland amidst our recession, inducing memories of the 1980's and beyond, Policymakers must refocus efforts on establishing not the same factors that produced the boom, but the underlying attractions and varying conditions that facilitated investment. Spare the Celtic tiger idioms and glam of success and concentrate on making Ireland convenient again.

Demographics and education remain relatively similar and our corporation tax seems currently low enough to be a safe haven for British investors. Not being the cheap option of Europe in terms of manufacturing and market access appears a changing condition since the E.U's enlargement and is a more serious aspect of FDI attraction that requires addressing. Convenience factors however, predominately our environmentally friendly, low carbon based economy, and emphasise on high performance work systems could offer a future platform to 'marketing convenience'.

Short term objectives of cleansing bank balance sheets allowing the creation of a toxic bank, an option that many European countries are sceptical of, may go some way to stabilising and promoting a healthy banking system, thus attracting investment and providing scope for competitive edge. This pursuit however must be dealt with swiftly and accompanied with necessary recapitalisation.

Will the boom be back? Only if we lay the seeds and market ourselves appropriately. The world may soon be open for business again, lets make sure we're competitive, find our niche and hope for our sake when things pick up investors won't want to shop at Lidl. Sounds simple but could be all to convenient...

Whats yours is mine, and whats mine is my own...

"Coming together is the beginning. Keeping together is progress. Working together is success" Henry Ford's words could be an appropriate mission statement for the E.M.U given the grandeur and scale of European monetary expansion and integration achieved in a relatively short period of time. Yet given the worrying news of the latest IMF global stability report the communal achievements of the past maybe washed away by the old reliables of individual member state differences.

The re-emergence of such nationalist monetary tendencies is natural, cemented by the fact European banks carry the majority of the 'bad assets' burden ($1,400bn) compared to the U.S. Why would Germany, whose economy will approximately shrink by 6% this year, seek to aid fellow member states? Short term interests while completely rational may however serve to undermine the decades of E.U achievement. Synchronizing policies even to a minimal degree should remain an important part of any member’s recovery plan for both philosophical and financial reasons; allowing member states keep faith in the benefits of cooperation and facilitating continual strength of the euro for the medium to long term.

Minister Lenihan's 'sort out your our own house' approach which appeared domestically important in our emergency budget amounts to a survival strategy that we would be naive to think wouldn't happen in other member states if the crisis escalates. Strong guidance by the E.U is essential in forming common strategies and ensuring national barriers do not re-emerge.

IMF global financial stability report:
http://www.imf.org/External/Pubs/FT/GFSR/2009/01/pdf/text.pdf

The Morals of a Hangover

A good article by Paul Krugman that disputes the Austrian theory of business cycle fluctuations, claiming that the practice of tough love only offers an easy way to moralise after years off excess, affording us a clear conscience.

http://www.slate.com/id/9593

A return to Oz

Bookshop orders for Frank Baum's 1900 classic, The Wizard of Oz, have surged in recent months as present authors seek inspiration to convey our financial plight. Being published at the end of a turbulent century for the U.S economy, the later half being characterised by waves of banking crises, Baum's characters and plot may be due for a Dail Eirinn broadcast.

With the Yellow brick road representing the gold standard, Dorothy's (original) silver slippers portraying the sixteen to one silver ratio, Baum's tale could feature as essential reading on any Economics course. Allowing for oversimplification, the metaphors on close inspection continue, the weak scarecrow representing the debt burdened farmers, the Tin man portraying the industrial workman who 'lost heart' from years of hard yet low paid labour, and Wall street bankers allowing themselves to the allegory of the supposedly brave, but in truth cowardly lion. While the emerald city expressed Washington preoccupation with green paper money, the Munchins played the simple role of ordinary folk. Sound familiar...

The Wicked Witch of the west aptly sports the role of the banks in the whole affair, but our politicians may learn most from the Baum's wizard; the fraud who claims illusory powers. I'm sure nobody would have problems devising a cast for a modern rewrite.

When all you have is a hammer....

Inadequate regulation, erroneous fiscal policy and old truths of irrationality may be important in telling the story of our current financial crisis to future generations but how long will the chapter on global mismatches be?

The present disparities between a global financial system which is maintained by national governments requires realignment. As global demand contracts, definitive trading slumps occur and with protectionist policies re-emerging it appears that finance may be becoming less global faster than governance globalises itself. Policymakers exchanging similar views concerning the need for greater regulation remains a starting point toward resolving the crisis in the most economically efficient way thus starving off a retreat from globalisation but one things for sure the relationship that existed, over the past ten years, between international finance and sovereign authority in untenable.

With G20 leaders devising overarching stimulus packages to kick-start the world economy, ailing national economies may need more detailed attention. A view reaffirmed by Angela Merkel who pointed toward the great diversity that exists within E.U economies in terms of industrial and agricultural production. Yes to improved regulation and appropriate stimulus but unfortunately, one size doesn't fit all.

Euro having a laugh?

In an interview with Today FM’s Matt Cooper on Thursday evening ,the Daily Telegraph’s International Business editor Ambrose Evans-Pritchard spoke in detail about the current woes facing the Irish economy. Central to his analysis were two noteworthy points. Firstly, according to Mr. Evans-Pritchard, Ireland is the only, yes only, economy in the world adopting contractionary fiscal policy measures. Secondly, Ireland is in dire need of two policy measures; a devaluation of its currency and quantitative easing, neither of which can be adopted given our participation in the EMU. One must pose the question therefore, are we not better off out of the Euro than in it?

This issue is being debated throughout Europe. In early 2005, cracks in the Euro were beginning to emerge as rural areas in the north of Italy began to only except Lira in exchange for goods and services. Not too much to worry about. However, in recent times the problems have become larger and more frequent. In a recent blogpost, Mr. Evans-Pritchard claims that the Germans are giving up on the Euro. Ex-Bundesbank Chief Karl Otto Pohl has recently stated that both Ireland and Greece are in danger of defaulting on their sovereign debts and may be forced out of the Euro. Even worse, former German Foreign Minister Mr Fischer now thinks the monetary union is beyond saving!

So, should we stay or should we go? For now, its a definate stay! An exit from the EMU would force interest rates to soar, our credit rating would likely fall further and speculative attacks on the currency could ensue. A cocktail for further disaster, hardly the thing we need right now!

Budget Anyone?

As Minister for Finance Brian Lenihan prepared to get to his feet yesterday afternoon tension in the lower house of the Oireachtas was at fever pitch as opposition TD’s protested at the fairness of the media being afforded the luxury of seeing the budget statement before they themselves. The question of fairness was raised and this issue of fairness will no doubt dog this, the Minister’s second budget, for some time to come. One thing is for sure Minister Lenihan’s budget can probably be best described using a version of President Obama’s now famous catchphrase – Can he tax it? Yes he can!

As predicted the budget was tough, described as “the budget from hell” by Labour TD Joan Burton as the government sought the plug the gaping hole in the public finances with both increases in taxation and decreases in expenditure. Two problems emerge here. Firstly, international evidence suggests that it is not wise to attempt to tax ones way out of a recession. Secondly, most of the expenditure cuts came on the capital side with less attention focused on current expenditure.

The Government claims that the tax increases are progressive – with those earning the most, contributing the most. However, nobody was spared. Lower, middle and higher income earners were all accordingly hit with increases in the income level. The ceiling for PRSI was increased, unemployed people under twenty saw their social welfare reduced to just €100 a week. Parents have seen childcare supplement halved next year and will see it disappear in 2011. As predicted very little tax was placed on the “usual suspects” – alcohol, cigarettes and petrol, with only smokers hit by a €0.25 increase in the price of cigarettes. Both capital gains tax and capital acquisition tax increased. Overall the government raised an addition €1.8 billion but is this enough to save our ailing economy.

The answer remains to be seen. The Ministers opened his speech with a 6 point plan for recovery; stabilising the public finances, restoring the banking system, regaining competitiveness, protecting jobs, stimulating consumer confidence and reinstating our international reputation. Some of the measures introduced such as the new asset management agency to take bad loans off the banks' balance sheets could help and will allow banks, which are an essential element of any economy, to recover faster. The establishment of the Enterprise Stabilisation Fund, worth €100m over the next two years, is aimed at providing direct financial support to eligible internationally trading enterprises and hopes to stimulate Irish exports – one of the sources of our now forgotten booming economy. The government mentioned the introduction of new retraining and education programmes and ironically the reduction of under 20s social welfare could be positive in the long run as there is a direct incentive to a greater return to education.

However, the outlook is still looking rather bleak. The severity of the tax increases introduction today has confirmed one thing for me today – we blew the boom. The medicine that we have all collectively taken has been bitter, the fear is that it may be so severe as to kill the patient. Let’s hope not.

Pokerface

While Lady Gaga's number one claims that it's all about "luck and intuition" famed Berkley economist George Akerlof has drawn a quaint inferance between the growing deception in financial markets and the rise of individualistic card games that encourage 'the bluff'.

Far from scientific, the tenous connection is novel. Akerlof's idea states that following the great depression contact bridge and other team card games created better social awareness, improved trust between parties and ensured greater levels of reciprocity. The rise of Texas Hold'em however has seen ones individual incentive to bluff and be deceptive for his own gain, rise. Avoiding ethical dilemma's of whether or not its right to cheat Akerlof believes that it would be naive to think that such changing trends in card games could not occur in the world of finance and economics?

Lets hope the cabinet is playing plenty of contact bridge because it doesn't look like Brian Cowan has an ace up his sleeve.

So You Say You Want A Revolution?

This past Monday, the Student’s Union of UCC put in a place a boycott of the UCC Campus. The reason? It was supposed to be a stand against the reintroduction of fees into third level here in Ireland. Quite what it was hoped this boycott would achieve is something I cannot fathom.

The recent upsurge in the supposed politicisation of the student classes of Ireland has come as a bit of a shock to me. There has until recently, been little or no indication that the average Irish student was a particularly political animal. But all of a sudden it seems, we are meant to be manning the barricades, joining the picket lines and storming the Ivory Towers of the College Administrators. Wonderful. Except for one thing: we haven’t been.

I was about the UCC Campus on Monday afternoon. And it was hardly the hotbed of political activism one was expecting. The all-student e-mail sent informing us to join in the boycott, asked that we respect the picket-lines. I saw no picket-lines this Monday. It occurs to me that the average Irish student would need little or no excuse to abstain from entering their campus on a typical Monday. Of course, the problem with this particular Monday was that it was no typical Monday. It was in fact the first Monday of our “month-off”/”study-month”. Hardly the day to start a revolution.

The college library seemed to be reasonably busy, and there was many a person wandering about the grounds of campus, quite blissfully unaware of the political foment they were supposedly disrupting, and the picket-line they had crossed. Maybe they didn’t get the e-mail?
Whatever one’s feelings about the re-introduction of fees (I for one, am not entirely opposed to the idea: it may improve the dedication of this nations students. If they were paying upward of €50 a lecture – they certainly wouldn’t miss as many!), one cannot deny that if the students of Ireland were really serious about their new found political activism and radicalism then something a bit more incendiary may have occurred in the past few months. But this has failed to materialise.

I, for one, have been decidedly unimpressed by the protests and marches engaged in by the student body of this country. In spite of the fact that strikes seem to be part of the zeitgeist of society once again, the students of Ireland (and their erstwhile governing body, the USI) have hardly been invoking the spirit of previous student movements. Maybe a look at how the students of Paris took things into their hands in May of 1968 (a spirit being invoked throughout the universities of France again at this moment in time), or the students of the University of Berkeley took a stand against what they felt were the unjust policies of the United States Government. If that is too far into the past for your liking, we the students might take a look at what has happened in the Waterford Crystal over the past two months.

A militant belief in worker’s rights has, after a long unflinching stand-off yielded, if not victory, then at least a compromised victory. The factory has retained some 178 jobs, from a possible loss of a full 600. Hardly a moment in the Great March Forward you’ll agree, but proof of what can be achieved when you take true industrial action.

If the UCC Student’s Union had asked us to boycott the college during the height of term, for a day or more then perhaps the message would have been louder and more effective.

But, as things stand it would seem unlikely that the current movement of students in Ireland will one day mentioned in the same breath as any of the other movements mentioned above.