Category: economics

Categories
economics

Saving the country

Between twitter and facebook it’s difficult to find the time to update this blog. An update is due however and a full redesign will happen soon, I promise. In the meantime here’s a colletion of “5’s” I’ve posted to the the McWilliams blog where he’s developing an your ideas section.
I’ve broken the list into short term changes which need to be made immediately and longer term changes which should be implemented over 5 years to help improve the balance and robustness of our economy. This is currently our major problem as we’ve a shallow economic base relying on a few tricks such as construction (gone) and multi-national FDI. Some of my suggesitons are controversial and some are tongue-in-cheek.
Short term list

  1. Accept we’re near bankrupt.The world’s dominant lending institutions are either not lending to Ireland or are issuing very short term credit believing we’ll be bankrupt within 6 months. Therefore we’re in an emergecy situation which will affect the lives of everyone living and working here. We need to stop pretending that budget band aids can fix this. It’s patent nonsense. We need to come clean on our financial situation as some builders are currently doing and start negotiating with our bankers to restructure our debt. We’ll also have to flog some of our assets, with all serious offers considered. To aid the flogging we need to end the legislated secrecy regarding house sale prices and start auctioning off unsold houses with no reserve.
  2. Nationalise and consolidate our banking sector into a rebranded good and a nationalised bad bank. The state would maintain a significant interest in the ordinary equity of the good bank and appoint new management with assistance from some of the better members of the current management.
  3. Create an all party government, taking the better of our current TD’s. If anything good could come out of this crisis it would be an interruption in the never-ending cycle of FF led and FG led coalitions. Appoint a council of our top economists and international financial experts with, perhaps, some prominent disapora figures to create policy for the dept. of finance and run the good and bad bank.
  4. Call the ECB’s bluff. Demand a bailout from the ECB on the grounds our bankruptcy will set of a chain reaction that will implode the EMU. Greece seems to be in the same boat. Demand emergency legislation to achieve it. If/when they refuse pull out of the Eurozone and reconstitute a punt pegged against the dollar. Whatever we do, we shouldn’t vote for Lisbon unless the EMU is empowered to bail-out nations in trouble rather than take action against them for running deficits by imposing sanctions/fines. The current situation is farcical!!! Our government is telling us to vote for a treaty that copper fastens a collection of laws which are actively hindering us from dealing with this crisis. The EMU is a joke in it’s current form. If you don’t think so then read this quite reasonable opinion piece in the telegraph
  5. Create the publicly traded recovery and innovation bonds I’ve described before. In a sense this is happening in an ad-hoc manner as we’re seeing consolidation in our research sector and we’ve already had a major national bond issue. The idea of this bond is that the coupon is redeemable as cash at a particular rate of as income or corporation tax relief at a more generous rate.

Long term list (implement over 5 years).

  1. Reform our tax system. Reduce taxes on labour and employment. Eliminate employers’ PRSI. Remove all tax reliefs on property rental income, effective immediately. Don’t make this mistake again. Remove tax relief on house purchases for first time buyers. Lower stamp duty and VRT. All these taxes just contribute to individual debt and are bubble promoting. Use some of the recovery bond income to aid this transition if possible. Increase corporation tax to 15% but keep reliefs on patent income.
  2. Identify wealthy diaspora figures to repatriate using our “ireland bond”. Using these, Create a tax haven for technology investors and investment, partnering with US VC firms. As part of this create research centres which are NOT directly associated with individual academic institutions. Take the largest and leading research groups in particular areas (Biotech, Pharma, IT, Telecoms, Alternative Energy) and give each 5 years of baseline funding for all staff. Consolidate groups from different colleges. Set hard commercialisation targets to gain future funding for another 5 years. These centres should then be separated from their current academic institutions (if applicable) with no budgetary overlap. Inter-college rivalries are mucking up research in Ireland IMHO. Ensure some decentralisation in this process.
  3. Scrap the pension levy and the defined benefit (based on time-served) pension for anyone not in the scheme more than 25 years. Implement a version of the EU regulations regarding pension fund protection regardless of whether we’re in the EMU or even EU.
  4. Reform the public sector. Introduce proper performance related pay. Delegate budgetary control and reward thrift with bonuses. Currently it’s nearly impossible for many PS workers to be thrifty as they don’t control their own budgets. This is a MASSIVE PROBLEM in the health service. Sack employees who get consistently poor reviews. No more jobs for life. Give many senior civil servants early retirement and replace them with new managers on perf-related pay.
  5. Reform the political system. Reduce the number of dail seats by around 20%. Require all political donations exceeding 500 Euro to be on a publicly searchable database. Reward local government for saving money rather than punishing them by reducing budgets for the following year.

Some Extras

  • Put more effort into weeding-out social welfare abusers. Impose fines or deport foreign abusers.
  • Cap mortgage size based on a multiple of disposable income. Around 10 times.
  • Introduce legislation to force lenders to accept a percentage of a property back as part settlement for debt, at the value they accepted at loan time. This would help dissuade lenders from bubble behavior.
  • Force some jail inmates to do community service. In the US they have inmates making cadillac limousines & RV’s.I want an RV!!
  • Become the 51st state officially. Failing that join the Commonwealth 😀
  • Introduce restrictions to limit (not eliminate altogether) the number of unskilled immigrants from all countries including those in the EU
  • I’d love to ban political parties in this state but (like some other points here) it will never happen 🙂
Categories
economics

Blue swan with pink spots

Could perhaps be created using genetic engineering in the future 🙂 I’ve been reading Nassim Taleb’s The Black Swan. It’s an engaging book once you get beyond the pages and pages of insults directed against professional statisticians.
They key point could be summarised as follows. Professional statisticians have become obsessed with applying gaussian distribution models to real world phenomenon which don’t match the model for a range of reasons. Primarily the gaussian model attaches a lower probability to rarer events than is actually the case in many real world phenomenon such as degrees of wealth. When these models are used for prediction and risk management the results may be acceptable when making predictions about data close to the median but are hugely error prone about rarer conditions. The seeming success of the model in limited predictions promotes over-confidence and encourages further bad predictions.
Mr. Taleb goes on to point out that Mandelbrotian randomness more accurately depicts many phenomenon as it allows for greater deviations within a sample and more probable outliers. The point is made enthusiastically and in an idiosyncratic style. It’s accessible in a way that encourages most people to understand the contents and query current models for market analysis. It’s not an in-depth mathematical treatise and this is ultimately a weakness given some of the grand claims. However, Taleb’s rage at the amount of bullshit spouted by should-know-better financial and quantitative engineers is understandable. You only have to watch market analysts in programmes on CNN, MSNBC to figure out that, with a lot of jargon, there’s often not a lot of actual knowledge or understanding. Differences of opinion and rude/crude arguments abound but few of the experts called the current crisis. What’s the point of accepted financial models if they’re not just unsuccessful at predicting (a very hard task) but cause risk to be discounted (a very bad thing)? The Black Swan is essential reading for anyone who’s blithely applying statistical models to whatever economic, marketing or social science application they’re working on. It should give them pause for thought.
So, back to my headline. Mankind are great at producing huge inequalities and surprising outliers. History is littered with them! The more power we achieve over our environment and, indeed, our genetics the more probable the improbable becomes. I’d content that the number of potential black swans increasing (if that isn’t too wild any idea). Not in a linear way of course. More of a giant leap, black swan, kind of increments 🙂 We’ve found black swans on the moon, black swans in space, black swans in the earth, on the earth and with genetic engineering we can create human black swans. Scary.
So the current market models are deeply flawed. Indeed they don’t seem so much models as talking points for TV debates. Who predicted the crisis? Currently in the “Deep Financial Shit is Nigh” hall of fame are international players like Peter Schiff, Nassim Taleb and local players like David McWilliams, Alan Ahearne and Morgan Kelly. Very few economists correctly predicted the current crisis nationally or internationally.
I believe one reason for this is that it became fashionable for these most miserable of analysts to predict boom followed by a soft landing. Economists by their nature are supposed to be pessimistic and risk aware. They should be over-predicting recessions, which is the butt of the famous economist joke.

“An economist is a person who predicts 10 of the last 3 economic recessions”

In this case, there seems to have been an international fear of being caught out in predicting an end to this boom, fueled by financial innovations in the bond market. Many economists simply suspended disbelief even when scandals like Enron encouraged skepticism. Conversely this old joke gives the lie to the belief that economists create recessions. They make predictions and pass comments. Some may add to recessions and further despair but if they could really create economic turmoil then their predictions would never be wrong!

Categories
economics

Nash, McWilliams and an economy of words

I picked up this link in my travels. The article contains an interview with John Nash where he discusses the current economic crisis.

“I get the impression that the government is not ready to do anything that is really beyond a short-term basis,” said Nash, a senior research mathematician at Princeton. “[But] we need a natural stability of value.”

Nash advocates an international monetary system with suitable accords like a new Bretton Woods. He fundamentally believes that such a system should be democratically introduced. He believes that short-termist keynesianism has wrecked the stability of the financial system. A big problem he has cited now and in the past is the variable rate mortgage. Should home-owners really be speculating on their repayments? Do many really understand the implications?
In many cases the illusion of liquidity was craved more than any tangible value. The sprocket-loan derivative market (fictional I HOPE) could be a great source of earnings as long as people kept buying sprockets. If they slow down, the mechanics of the market falls apart as, like a Ponzi scheme, it’s reliant on getting more derivative buyers in so previous buyers can bail out at a profit.
Something like the gold standard has always been deemed inflexible in times of extravagance, mostly due to the cost of warfare. Does anything good come out of a fiat currency, unbacked by commodities? Does it really create sustainable wealth that wouldn’t arise otherwise?
Is the opportunity it creates simply too hazardous to our wealth (and health)?
Despite his well-documented problems Nash is, perhaps the world’s most famous and most brilliant economist with a formidable reputation as a pure mathematician. His comments ring true and this crisis is an opportunity to bring about a more conservative economic system again with less exotic derivative products acting as “get rick quick” mechanisms for greedy hedge funders. Still you have to be brave and a bit different to affect real change.
Right now, we really need change. Lateral thinking backed by some pragmatic experience. One way to do this is to put someone in charge of the banks in this country who thinks differently Which brings me around to the obvious conclusion that Lenihan should appoint David McWilliams as the CEO of one of the banks. Yes, the floppy ginger haired bloke who used to present Agenda and wrote those books about our economic rise and fall. If anything, he’s got timing and great TV hair. Very important in a bank CEO.
I’m deadly serious here. McWilliams has the credentials and the experience of the banking sector. He has worked in the central bank, as an analyst for UBS and as a director of BNP. His predictions have been prescient yet he appears to listen and respond to criticism well, certainly on the evidence of his blog. When an idea is berated he’ll discuss it rationally, responding reasonably to even savage criticism. We don’t get much of that in the FF-led government these days. BIFFOT, Minister for Cork & Battman don’t seem able to take criticism with anything less than a snarl. Then there’s my namesake.. 🙁
On the positive side the Walking Handshake from Drumcondra is gone!
Even more importantly, McWIlliams would scare the over-leveraged but still living shit out of the incumbents. He’s been attacking them for years so imagine their discomfort to be faced with him as their boss or competitor. We might aswell make Michael O’ Leary Taoiseach. Now there’s an idea.
Seriously though, whatever cash he wants, whatever it takes to entice him back into the financial sector, we should pay him. It would be worth it for the entertainment value alone and we’ll need a lot of entertainment over the coming months to distract us from the economic misery in store.

Categories
economics

Budgetting for a generation of fear and loathing

Brian Lenihan has committed the political equivalent of armed robbery. Now that the sham of the celtic tiger economy has been exposed. While the budget is to “target all sectors of society” according to today’s Irish Times article, it’s difficult to see what good that will do.
“Radical direct and indirect taxes” mostly affect the middle and upper middle classes. Think of families with 2 working parents earning between 70 and 110k in total. That seems like a lot of money until you realised they’re saddled (or perhaps shafted) with massive debts to buy mediocre accomodation and are possibly in negative equity. The bigger their salaries the greater the debt on their massively overpriced accomodation that this same government encouraged them to buy. Their fuel bills, travel costs and medical bills will now rise.
Their children’s allowance will be cut. Their mortgage relief has been cut. Any to cap it all.. a move of utter stupidity a half percent rise in the high rate of VAT.
I suppose we can console ourselves that by using less fuel and catching pneumonia we’ll be delivering a double benefit to the environment. I miss the principled outspoken PD’s when all I see are these ingratiating tax apologists hanging onto the monster’s coat tails. I’m talking about the greens of course 🙂
As a retailer I can tell you I’m feeling the pinch together with everyone in “trade”. Consumer spending has been moving steadily down the past 2 christmas as rising interest rates and massive house prices reduced the disposable income and hence spending. The sheer pointlessness of raising the high rate of VAT to 21.5 percent. Retailers around the country will have an extra bit of their margins eroded and will have to adjust prices. Has Minister Lenihan noticed the whole country is on sale?
Throw in overpriced childcare and this budget has pulled the trigger of the long gun barrel the middle classes have been looking down since our economy went into free fall. This group are the engine of most retail in Ireland and on their spending many businesses will fall, creating more unemployment, poverty, emigration and all the negative aspects of Irish life for decades. It was well known economist Morgan Kelly who suggested that the boom was so great because successive generations of governments had managed to insulate the Irish people from the effects of a boom for years. Cometh they hour, cometh Lenihan!
The government are suggesting the poor have been protected. What about the friggin middle classes or the “new poor” as I like to call them? I know a few families of modest incomes that are already struggling. Finances are tight and jobs are uncertain. This budget won’t help them or ease their concerns one bit. Instead, it slaps them across the face for bothering to work as opposed to living on benefits.
It seems the super rich (the oligarch class as David McWilliams describes them) will escape relatively unscathed with tax incentives in place and a relatively modest hike in income tax. It would be such a shame to hurt the stud farm industry. I wonder do they escape the 1% levy?
We already some of the world’s highest levels of indirect taxation masking a low-ish direct tax regime. Far from reform we’ve moved farther away with, in reality, nordic levels of personal taxation for inadequate service provision.
Raising taxes across all sectors has been proven time and time again to exacerbate the effects of a recession. While the reckless trading of credit derivatives in the US might have created this crisis, there’s a cogent argument to suggest that raising taxes brought about the recession that together with US bankruptcy laws led to the meltdown in the sub prime market.
The following piece from the Cato Institute makes some valid points about the effect of increasing tax burden during a downturn. By reducing growth and actually causing bankruptcies such measures increase the burden on the exchequer. Raising taxes only bails out the state for poor economic planning. It HAS NEVER and NEVER WILL ameliorate a recession as it reduces the available income for industry, spending etc.
Richard Bruton also made some neat points about this “take away” budget.

“This is a Budget that is all about extra taxes for ordinary families, about extra charges for people, and about cutting capital spending,’’ said Mr Bruton.
“You are looking to make it tougher for people who are struggling to get by,’’ he added.
“There is no sign that you are aware of the pressure on people from fuel bills, the pressure on people who have lost their jobs.”

There are signs he may actually know what he’s doing and it’s a shame that Enda’s shiny suit distracted from what could have been a very capable minister for finance. There’s still time!
It’s difficult to be shocked that a Belvedere-educated, former Trinner-lecturing, barrister (Lenihan) is a bit out of touch with the general electorate. Oh, of course we needed to do this to remain within our EMU parameters. That’s some incentive to the overstretched single parent who’s had their child support for college-going kids slashed. How will they pay the registration fees which just doubled. Equal opportunities indeed.
If the management of a public company had performed so badly they’d be ousted at an A/EGM. Yet the cabinent are congratulating themselves on their principled 10% wage cut. They got reelected by telling the people of the country an economic fairytale that several economists rubbished and which precipitated a crisis in almost the exact way they predicted. There’s a clear attempt at political misdirection where they try to confuse the issue in the public’s mind. The credit crunch hasn’t lowered consumer spending NOR did it lower a few weeks ago. This is a fallacy and any attempt to suggest this budget is entirely the effect of “worldwide economic conditions” is horseshit. George Hook dealt with this very nicely when Miniature Cullen tried this tack on his radio show yesterday evening.
What can we really expect when we don’t have a cabinet member who has any experience of running an SME? If we keep electing these monkeys we SHOULD EXPECT to live on peanuts.