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.