Credit crunch: don’t knock the public sector

Brace yourself for some necessary staring into the entrails of economic forecasting for “these islands,” the smaller island in particular.
“Shoot the doves” is the FT’s message to those who hanker after a relatively quick return to faster growth; inflation is the deadly enemy, with the latest reports forecasting the UK teetering on the brink of recession and prospects for next year “dimming.” Households are £700 a year worse off, with rising food and fuel bills, according to the latest reports.
The Economist’s country briefing for this month adds its authority to a stark appraisal of prospects for the Republic, where recession is already happening.Economist quotes:

“In the decade up to 2006 residential property prices in Ireland rose more rapidly than in any other developed economy. Strong demand partly explains this: incomes, employment and population all grew robustly. The increase in the supply of new housing was just as phenomenal—the number of annual housing completions in 2006 was almost five times that of the early 1990s, which compares with static output in the euro area and in the UK. However, when supply and demand fundamentals are considered in tandem, the enormous increase in prices was unjustified.

Consequently, the country’s property market is now going sharply into reverse. Prices have been falling for 18 months and excess supply makes further declines all but inevitable. In the event of an even sharper correction than is currently predicted, the main lenders would probably suffer badly. Although Ireland’s banks have been highly profitable over a long period and are thus well capitalised, they are hugely exposed to the domestic property market. The international credit crisis, should it continue, could cause serious financing problems for the banks, adding to concerns about their balance sheets”.

And Northern Ireland? Different emphases, different reports. A fairly chipper view from the Executive, concentrating on the state of the job market and direct investment news, reflecting – I fear rather misleadingly – its narrow “Enterprise” functions and lack of responsibility for the wider economy.
A cheer-leader’s nose is put on the story from Belfast Telegraph. PWC in the Irish Times is a good deal more sober, forecasting growth of 1.25% compared to the official 1.8%. Both are less than half last year’s growth, PWC adds:

“The outlook for household spending growth in Northern Ireland is looking more subdued now than at any time since the early 1990s.”
The latest gloomy economic predictions for Northern Ireland come as one of the UK’s biggest mortgage lenders, the Halifax, revealed that house prices are now falling at their fastest rate in nearly 20 years”.

The mantra for the medium term and long term is I’m sure correct: that NI needs to switch from overdependence on the public sector to high value-added private sector investment and growth. But in the meantime, even with budget cuts, don’t knock the public sector for keeping NI on course.

  • the lovely miss fitz

    I think a long view is always neccesary on issues such as this. The past 30 years have seen a fundamental change in how people view both housing and their own personal finances, and we have begun to take certain things for granted in a very short space of time.

    The furious growth in housing and prices had to come to an end, as the Economist has said, when considering basic supply and demand factors. I also contend that a lot of what we are currently experiencing is a direct end result of the policies of the Thatcher government in the 1970’s which liberalised the financial services and allowed public sector houses to be purchased by tenants. We are thus entering into unchartered waters, with no road map or previous experince as to how this will resolve.

    The fact that the UK personal debt remains at an unprecendented high is a very significant factor. This particular hen was going to roost at some point, and is doing so now with a vengance. Repossessions of houses and individual bankruptcies are starting to approach 1990 levels again, indicating a serious problem with the maintenance of the private housing market.

    I hate to be totally pessimistic about this, but I dont think we will be returning to the days of spend and equity release for many years to come, if ever again.

  • It was Sammy McNally what done it

    Economists must be the most useless bunch of feckers on the planet – the banks may as well boot them out and get in a few fortunetellers in their place.

  • Dr Strangelove

    I always wondered where the money was coming from in the North to pay for the houses and flats which were being constructed at such a ferocious pace over the last few years. Any time I was in the North it seemed most of the building work was residential, thus short term employment opportunties.

    Having walked around Belfast city centre for the first time in several years a few days ago I was quite taken aback by how run down and depressed it all looked. It seemed there were quite a few shops empty and there was a real lack of spirit. However, that may be down to the holiday season.

    The Victoria Centre seemed to have seriously overpriced shops for Belfast and the city gave the definite impression that there is not much money about.

  • Dave

    Well, there is bugger all we can do about it since we have surrendered sovereignty over our monetary policy and currency to the European Central Bank by joining the Eurozone in 1999. We are at the mercy of the one-size-fits-all macroeconomics, determined by what is happening in the economy of Germany rather than by the requirements of our economy.

    This is why house prices increased dramatically since 2000 and household debt more than doubled between 2003 and 2007: interests were set by the European Central Bank at 2% were the actual requirements of the Irish economy was for interests rates to be set at 6% under the Taylor rule (4 points above what they were set at). So we got record house building, annual credit growth running at 25%, more than doubling of house prices, and 5.5% average inflation in the service sector, etc.

    Now, thanks to dumping the punt, we have to live with the effects of unjustifiably cheap credit and to live with it without the ability to do anything on a macroeconomic level to correct it.

  • The Raven

    “The mantra for the medium term and long term is I’m sure correct: that NI needs to switch from overdependence on the public sector to high value-added private sector investment and growth. But in the meantime, even with budget cuts, don’t knock the public sector for keeping NI on course.”

    Thanks Brian. This is a view I have been espousing for some time, in the face of considerable opposition from some people in here, who think that the public sector should all be sacked anyway.

    Turns out they may be the buffer we need right now. Expect usual glib comments from those who think the state should be run by the private sector and that this is all the public sector are good for.

  • Greenflag

    Dave ,’

    Well, there is bugger all we can do about it since we have surrendered sovereignty over our monetary policy and currency to the European Central Bank by joining the Eurozone in 1999.’

    Nonsense . The USA , New Zealand , and Australia are not in the EU and the USA has an even worse credit crunch than the EU . Now even ‘prime mortgage’ holders are being ‘evicted ‘ for not being able to pay their mortgages in the USA . Unlike the EU countries such as the UK and Ireland ‘mortgage ‘ defaulters in the USA are out the door after three months so EU citizens have more ‘rights’ in this respect than their USA ‘equivalents ‘ which is why the USA’s economy is hurting a lot more than the EU’s . In addition there is the little known fact that only one third of US employees ‘qualify’ for unemployment benefit if they lose their jobs.

    ‘and to live with it without the ability to do anything on a macroeconomic level to correct it.’

    So we’re like the USA then . Bernanke the USA’s Federal Reserve Board Chairman has been ‘twiddling’ his thumbs for months not knowing whether to increase or reduce interest rates as he watches simultaneously the effects of a falling dollar , rising inflation , billions going into a hole in the ground in Iraq , two million forclosures , property prices still dropping and increased political instability in the Middle East with Mr Busharraf being forced to seek asylum in Saudi Arabia ?

    The roots of the present crisis go all the way back to Messrs Thatcher in the early 80’s and Nixon in the 1970’s as she bolted for a services economy and deregulation of banks , building societies and as Tricky Dicky took his eye off the Wall St casino merchants and allowed the ‘gangsters’ to write their own meal ticket with little oversight . Under Reagan , Clinton and the Bushes it just got steadily worse . The UK and Ireland to a lesser extent followed suit after all we are closer in ‘culture’ to the USA and the UK than to the EU countries ?

    Well perhaps but obviouly not when it comes to electing heads of State . I have yet to see any contenders for British Prime Minister , German Chancellor , French President or Irish Taoiseach have to take part in a tv ‘Christian values trial ‘ chaired by the pastor/business CEO of a mega church 🙁

    The present crisis has been triggered initially by insufficient government control over the various gangs of thieves and looters in the financial services sector on both sides of the Atlantic plus the the ‘ greed ‘ of residential property owners who ‘believed ‘ the lie that ‘everybody’ can get rich buy buying houses .

    A classic case of bad money driving out good and a victory of ‘bad ‘ capitalism over ‘good’ capitalism .

    BW , Miss Fitz and Raven are correct . In the circumstances in which NI now finds itself the last thing they need to do is ‘dump on ‘ the public sector’ . Anybody who understands NI would know that if government went for the latter the sound of gunfire would not be too far behind .

    Unlike Americans who seem to allow themselves to be robbed ‘blind ‘ by the large corporations, banks , insurance companies, oil barons, and war mongers until they no longer can tell Monday from Friday -the British , Irish, French ,Germans etc are more likely to take to the streets in defence of their rights.

    Corporate America through it’s control over the ‘radio waves’ may convine many US voters that God will save them from perdition . Europeans apart from a few in the North East of Ireland won’t buy into that sucker’s fable !

  • missfitz

    I will take this shameless opportunity to promote the course I teach with the Open University.

    Its called ‘You and Your Money: Personal Finance in Context.’ For anyone with an interest in finding out more about the present situation, it is an excellent course at Level 1, and provides an invaluable guide in navigating the present crisis. It looks at both the social and economic context of money and finance, and covers all aspects of financial services and planning.

    The Course code is DB123, and you can get there from this link: http://www.open.ac.uk/courses/tasters/db123/

  • Greenflag

    missfitz ,

    ‘I will take this shameless opportunity to promote the course I teach with the Open University.’

    LOL – We can all do with more ‘shamelessness’ 🙂

    Let us all now join hands and sing 🙂 ‘After the horse has bolted after the ‘ to the tune of after the ball has ended :).

    Seriously this kind of education should be ‘introduced ‘ also as part of second level education at least to a degree (no educational pun intended ). .

    By the time young people get to college and or their first real ‘jobs’ their spending profile , excess drinking , smoking and other money burning habits are already largely formed I would think ?.

    I once did an Excel Spreadsheet on how much money a twenty a day smoker burns his/her way through from the age of 18 to 65 . Using just basic arithmetic plus compound interest any teacher could ‘prove’ to any class of even the dimmest that setting fire to several hundred thousand pound/euros or dollars is not a wise ‘investment ‘. The same exercise could be done for the ‘ 20 pints a week fraternity .

    Thanks again miss fitz and I hope your ‘shameless’ promotion achieves the results it deserves 🙂

  • missfitz

    I don’t know hoe many people know, but in ‘real life’ I do a little money and debt advice, as well as administer a benevolent fund. I’ve been doing it for almost 10 years now, so I guess when it comes to those difficulties on a personal level I would be very much in tune with the situation.

    I could not agree more about the issue of education, particularly at schools level. I deal with many younger workers who find that a wage of £800 per month is the largest sum of money they could have dreamty of, then promptly go out and spend about £1500 a month on credit.

    The DB123 was developed alongside the FSA several years ago, and has proved to be one the fastest growing courses ever offered by the OU. It was heavily promoted in GB, but not in Northern Ireland. However, we are about to launch a promotion campaign at the end of the month to rectify that!!

    But getting back to the original post, one of the most significant complications of this ‘new money’ since the 1970’s was the complete lack of awareness on how it should be handled. There is definitely an argument about horses and stable doors, but I guess one has to say better late than never.

  • LURIG

    Totally agree Sammy, I have been saying this for years. Economists, bankers, traders etc are self serving bunch of tea leaf readers. They are bookies who know as much about future economics as you and me but arrogantly lecture the rest of us about it; they are all bullshitters out to make a quick buck and screw the rest of us in the process. Look at the way they have fecked up the housing market while the fat City trolls order £10000 bottles of wine in their private clubs and get rich on ordinary peoples misery. Doing the lotto has the same odds as knowing what’s going to happen down the line financially. They bang on about slashing the public sector to hide and cover their own failings. Any time I see or hear one of these corpulant smug sanctimonious patronising gits tell us we will all have to tighten our belts I feel the urge to put my size 10 boot through the TV. Along with weather forecasters I would send them all to live on Rockall where they can tell each other their crap predictions ’til the cows, or puffins, come home.

  • It was Sammy McNally what done it

    LURIG,

    I’m not too bad with weather forecasters – as they are a miserable bunch as a rule and dont really get on my nerves. But psychologists are the other annoying feckers – they spend most of their time arguing between each other about their latest funny theories instead of getting on with some proper science and when they are not jibber jabbering about some aspect of life they know absolutely nothing about they are practicing their withcraft on some unsuspecting fool and often charging them an arm and a leg for the privliege.

  • runciter

    But in the meantime, even with budget cuts, don’t knock the public sector for keeping NI on course.

    It will be ironic if NI’s much-derided public sector economy proves more resilient than its free-market counterparts over the next few years.

  • Dave

    Greenflag, it’s far from “nonsense.” Our interests rates should have been at 6% under the Taylor Rule at a time when they were set at 2%. We could not set our interest rates at the correct rate because we had surrendered control of our monetary policy to the EU. Ergo, we had people borrowing huge sums of money to buy houses at mortgage rates as low 2% when a proper interest rate would have been three times higher, thereby discouraging them from borrowing money that they could not actually afford to repay and also discouraging them from pushing up the value of property to levels that would result in negative equity. We surrendered control to the EU and we are now paying the price for being unable to exercise sovereignty over our own monetary policies. This has nothing to do with America: it entirely the result of surrendered sovereignty.

  • LURIG

    ‘Free market??????’

    It’s as about as free as an ordinary Shinner at a Connolly House controlled Ard Fheis. These greedy immoral right wing capitalist b*****ds play with peoples lives and jobs like moves on a Monopoly board (NO Not Sinn Fein….but then again). There is nothing free about Western multi-nationals and international conglomerates moving jobs to sweat shop & child labour economies so that their profits, investments and share dividends increase. Ask the workers at the chocolate factories in England whose jobs are being moved abroad so that some of these Investment Groups can save a few pound in wages. The media are as much to blame because they hang on every word of economists, bankers and the CBI like lovestruck teenagers. Instead of grilling these Gordon Gekko’s about why they have f**ked up the economy and housing market INSTEAD they let them turn the tables and say ‘….well the public will have to pay for this’ as usual. Remember when the business world scaremongered about the minimum wage telling us it would threaten 1000’s of jobs. Well it DIDN’T but still the private sector was given free reign to spout their usual Dickensian bull. Some of these tax dodging crooks are cold, ruthless, sinister fiends who should be in a court for their crimes and not paying their way like the rest of us. Roll on the revolution.

  • runciter

    it entirely the result of surrendered sovereignty

    In the interests of honest debate, it should be pointed out that a government has more powers at its disposal than just setting interest rates.

  • Lafcadio

    LURIG & Sammy, I don’t know what ‘economists’ you’re referring to here, I personally haven’t come across many who confidently foretell the future in the way that you seem to object to so strongly. And in reality (rather than in your rather lurid imaginings of the ‘city’ etc) most credible economists in academia or the press were sounding concerned about the economic imbalances, high indebtedness, loose lending, house price bubbles etc etc for years before it all came to a head last summer.

  • It was Sammy McNally what done it

    Lafcadio

    the banks commercial and central are stuffed full of economists and look at the mess they are in with lending and dodgy financial intruments. They are guilty of after-the-eventery of the highest order.

    The engineeers advising a building company would be booted out if we woke up one morning and all their bridges had fallen down.

    As the old chestnut goes economists have predicted 5 out of the last 2 recessions.

  • Greenflag

    Dave ,

    When financial ‘regulations ‘ or should I say the lack of them allowed people to buy houses with no desposit and sometimes evven 110% mortgages wheter the interest rate was 2% or 6% would hardly have mattered . What is clear from this crisis is that the ‘financial services sector ‘ on both sides of both the larger and smaller ponds were let loose by the Governments years ago and what we have seen happen was virtually inevitable . The ‘politicians’ had the wool pulled over their eyes by the ‘promises ‘ of the voodoo financiers . Not for the first time and probably not for the last and to be fair some of wool pulling was done with the victim not completely unaware of what was happening but resistancce was subdued by the usual sweetener – contributions to a re-election fund etc etc ! For individual sucker consumers too functionnally illiterate to read the ten pages of small print well they ended up being suckered by the ARM (Adjustable Rate Mortgages ) and a LEG (Let Equity Grow ) merchants .

    IWSMNWDI ,

    While I share to an extent your comparison of economist forecasting abilities to those of the fortune telling fraternity, I would remind you that a former USA President now deceased, much admired by American voters, was apparently influenced in his pursuit of foreign policy objectives by his Astrological Advisor 🙁 (some still maintain those policies were a success :)?

    Lurig ,

    Before you throw out the baby with the bathwater remember it was the elected representatives of the ‘people’ who chose to believe that the bankers and corporate moguls were so imbibed with ethical codes of behaviour, that they would never behave like the proverbial 18 year old teenager let loose on the town with the car keys, a hot little number to keep him company and several bottles of whiskey plus other unmentionable excitatory stimulants and has to be retrieved from the morgue or jail next morning .!

    Just to add perspective whereas millions will suffer in the present downturn we are unlikely to see the benefits of the Russian revolution again – Nobody I know is looking forward to 60 million dead and another Iron Curtain .

    All that’s needed is major reform in some financial services sector practices throughout the Anglosphere world .

    We need to reverse from ‘bad capitalism ‘ to good capitalism . And we need more people to attend courses like the one MISS FITZ has been shamelessly promoting here on slugger – something I would never have the cheek to do 🙂

  • Greenflag

    ‘As the old chestnut goes economists have predicted 5 out of the last 2 recessions. ‘

    I thought it was 8 out of 3 :)?

  • DC

    “The mantra for the medium term and long term is I’m sure correct: that NI needs to switch from overdependence on the public sector to high value-added private sector investment and growth.”

    This is the problem Peter Robinson has; he will have to, I believe, streamline middle-management pay and chip that back into lower grades in order to cut fat off management who are getting too much pay in disproportion to the private sector. This must disincentivise re-skilling towards new market technologies and services, highly likely too that such civil servants do hold or once held a fairly attractive degree in something but are happy plodding along.

    Robinson and McGuinness need to realise though that the NI economy is bloated with over-paid bureaucrats, while all the same greatly experienced both in terms of efficieny and qualifications, are still nonetheless too blunt for sharp innovative private sector management and thinking. This isn’t just a NI problem, Britain too is the same re GDP per hour worked, however, I imagine, without having figures at hand, that on a regional basis NI is very sluggish.

    I have no idea how under the banner of unionism and indeed nationalism the fundamental changes can be made; let alone having a serious and stark debate on switching skills and attracting new business, which could bolster private sector growth. Some pain is needed however across the board I imagine public sector workers are not that keen on being told what to do by the DUP and even less SF, given that party’s lack of experience in writing up good economic policy. Match that with the dry non-visionary business language verging on ignorance coupled with Biblical approaches to certain things and the whole situation of needy reform seems doomed to fail from the outset!

    You can see why the Republic doesn’t want to go near NI in terms of welcoming it to the fold as it has had to reconfigure its own workforce to match its market needs and somehow I fear NI would need new training across the board to adapt to a Euro-led economy.

  • Greenflag

    DC,

    ‘I have no idea how under the banner of unionism and indeed nationalism the fundamental changes can be made; ‘

    Neither do I 🙁 I would not however rely on heavenly intervention . The track record is not good . Historically in societies under stress there has been a turning to God . In 16th century Spain they turned to ultra catholicism – the Inquisition , following mass conversions of Jews and the expulsion of the Moors . BY the 17th century Spain was no longer a ‘world contender ‘ but had been reduced to a backwater. In the 17th century the Dutch took over. The Calvinists tried to re instate the rule of God and deport German catholics and Jews and keep Dutch catholics out of political power – By the 18th century the Netherlands was in decline . In the heyday of Empire Victorian Britain was about ‘morality’ . While the poorer English died of dysentery in the slums the wealthy preached salvation and the poverty of the people was blamed on their ‘moral ‘ failings . Likewiswe the ‘famine ‘ Irish were being punished by God for having the temerity to hold on to the wrong religion . The same ‘unreason’ at work then as now . After the ‘bankrupting ‘ experience of WW1 -Britain was on it’s way out as the leading world power .

    Today in the USA we see the power of the born agains nutters ,as they try ‘explain ‘ Americas decline by pointing the finger at those who do not follow the ‘Bible ‘. There is a huge and growing ‘knowledge ‘ gap between mainstream Protestants (Episcopalians , Methodists ,Presbyterians (not the independents), Catholics , Lutherans , Jews , and secular humanists /agnostics on the one hand, and the Pentecostalist , Born Agains, Assemblies of God , Rapturists , Southern Baptist etc on the other .

    Jesusland has it’s eyes fixed via the Republicans not on reincarnating Dixie but on evangelising the entire USA and turning into a Western equivalent of Iran i.e a theocracy .

    And as with all the previous historical examples that ‘s a signal and precursor to war and eventual national or imperial decline . Along the way in all the above examples the ‘moneymen’ led the way at the end through the uber financialising of their societies. The financial services have been to the fore in piling wood on the pyre of relative decline .

    Why should NI be any different? The example is already there from the days of Roaring Hanna -to all manner of ultra religious ‘politicians and their followers today . Messrs Robinson and Storey are only the tip of a very large support group who await the end of days and the coming of the Lord very soon. Why worry ? Why not leave it to Jesus coming soon to a battlefield near you called Armageddon 🙁

    Of course unlike the above mentioned societies NI has a ‘ sugar daddy’ to help take away the pain . Just as well friends -just as well -for now anyway !

  • Glencoppagagh

    The trouble with the public sector is not simply the numbers (bad enough) but the fact that they are paid so much relatively.
    Why assume the additional economic risk associated with private sector employment when you’ll be rewarded less?
    It’s imperative that public sector pay in NI falls relative to the private sector but can you envisage any party at Stormont having the conviction or the courage to bring this about.

  • Glencoppagagh

    Oh and to bring the thread back on course a bit, it’s just nonsense to suggest that the public sector is keeping NI on course.
    The only reason we have it is because somebody else is paying for it.
    I’ts a kind of lon-term indoor relief scheme provided by Westminster.

  • It was Sammy McNally what done it

    GreenFlag,

    5/2 or 8/3 – that the trouble with Economists they cant even agree on things after the event.

    re. Non Iron house prices. It is always amusing when they (e.g. the BBC ) discuss Non Iron house prices in a UK context and dont even mention the ROI which they seem to have far more in common with. It would be interesting to know how much speculative money from ROI crossed the border in the last 5 years – particulalry in border areas.

  • DC

    Totally agree about the ‘relatively’ aspect. But it is not even the pay but product and produce. I mean, great as it is that civil servants can write great and manage strategic implementation et al, but private sector is about rising with the tide of market-based demands and supply.

    In my opinion what’s best is greater flexibility in contracts, legislation to remove ultimate lifelong contracts, so that in areas of poor performance re workplace approaches and attitudes people can be let go; it should also be easier for staff to leave the Civil Service to go to value-added private sector work and to encourage that there should be a sunset clause that allows a return point to the cushy CS if it doesn’t work out in the priv sector. There should be a serious re-think as to performance management across the Civil Service which is line-manager-centric, thus open to teacher’s pet syndrome or in contrast pet hate.

    The whole agency side of the Civil Service needs overhauled with new job titles that match both the actual job function and the varying levels of pressure that comes from client contact and case volumes. Pay scales adjusted accordingly.

    It should be easier for people to resign whether it is public or private so that people are not trapped to work a month and can move but also if people resign over working practices it should spur on employers to improve or face being caught unpleasantly short, with its own set of consequences. And then there is the whole issue of under spend in the civil service where it is tantamount to a criminal offence to be caught with that. In my view perhaps accounts management should be compartmentalised maybe over to a private-sector approach where finances are spent with integrity and underspends returned. In addition, public sector workers should always be fluid so that when, as it does, work bottoms out the staff can be sent to sectors where work is being created by new policy or spends. Displacement as per water and channelisation, staffing should be flexible.

    As for SF, Gerry Adams was found out last 07, he was embarrassing, especially when you watch his performance again as I have done in the cold light of repeats in 08. I don’t think he recovered from that, for example he was quoted as saying that other parties wanted to reduce taxes yet increase spend and he couldn’t figure out how that was possible! Well of course, it depends on who and what you’re taxing and in the level across a particular band, so that more productivity and indeed a lesser level of taxation can ultimately bring in more monies in the end.

    The DUP are hamstrung over cultural and religious problems at the moment making what should be the easiest tasks difficult, not to mention the fact that Robinson is negative and uncharismatic making unpopular economic reforms all the more difficult coupled with his poor working relationships with SF/nationalists.

    There has been 30 years of wasting time and lives but the blow back now is likely to be serious, old Paisley lasted one year; after watching Adams last year I think there are some real uncomfortable truths needing faced up to, not down. Ireland has moved on so much that bizarrely Northern Ireland with its large socialist public sector and slow sectarian politics may actually be more his style. The Republic may now be beyond his own world view, that I think is something he hasn’t come to terms with, or perhaps he is stunned into silent denial. Life has moved on in Ireland especially so over the last 20 years that I wonder if it is unrecognisable and is beyong the appeal of SF in that it is impossible to instill its own political values. The northern political outlook crumbled in 07, whether it can be put back again on terms acceptable to McGuinness-Adams’ longstanding political views remains to be seen.

  • 0b101010

    Of course the public sector is resilient, it’s managed. Reliance on a massive public sector has left the country stagnant and solidified our position as pseudo-Eastern Bloc economic backwater.

    It isn’t the fault of Economists that people have been buying property five to ten times more than they can afford on their public sector pay.

    Anyone with half a wit could see the problems with our housing market coming from a mile off.

  • Greenflag

    IWSMNWDI,

    ‘It would be interesting to know how much speculative money from ROI crossed the border in the last 5 years – particulalry in border areas.’

    Old Chinese saying touch black paint have black fingers’ 🙂 . Some ROI fingers no doubt have been blackened on this occassion through being ‘burnt ‘ – figuratively speaking of course . Timing can be a bitch 🙂

    DC

    ‘Ireland has moved on so much that bizarrely Northern Ireland with its large socialist public sector and slow sectarian politics may actually be more his style. The Republic may now be beyond his own world view, that I think is something he hasn’t come to terms with, or perhaps he is stunned into silent denial.’

    That’s a very good observation DC – I believe for the medium term SF will hold up their vote in NI but the southern challenge for SF must appear all but insurmountable .

  • Harry Flashman

    @Greenflag

    “I would remind you that a former USA President now deceased, much admired by American voters, was apparently influenced in his pursuit of foreign policy objectives by his Astrological Advisor”

    Any actual evidence for that absurd claim there GF?

    And I don’t mean an unsubstantiated claim by an ex-employee with a grudge that the [b]wife[/b] of the president in question may have enjoyed reading astrology from time to time.

    I think I may have to take a line through your nonsensical “Rapture” claims and astrology allegations to come to the conclusion that you really do just hoover up any old anti-American drivel you find on the internet and repeat it here as gospel truth.

  • Lafcadio

    Sammy – if only the banks had been stacked with economists.. banks business is not economic analysis, except insofar as they think it affects their profits – they are income-generators, risk-takers and bonus-maximisers, and there’s plenty to point your finger at there (and a lot is being done by the hated economists at the minute) – but to conflate ‘economists’ with ‘bankers’ and ‘capitalist running dogs’ and whatever other socialist cliches you want to trot out is to misunderstand economics and economists pretty profoundly.

    I recently flicked through a book called “Economics” published by the Economist – so probably as close to current orthodoxy as you will find. It was published in 2005, and drew on material dating from ’99 up until ’05. In other words a time of a build-up of great macroeconomic imbalances and financial risks. So if we’re to believe your stereotype, this slim volume should have been telling us that there were no problems in global finance, that risks were well mitigated, that property prices were hunky-dory etc etc?? Go and have a look – chapter after chapter on the risks of banking, and the potential dangers of build-ups of risk that aren’t apparent at first glance; problems of regulation; asset price inflation, specifically development of housing bubbles; and so on and so forth.

    In other words, a pretty impressive wrap-up of the issues that went on to cause the problems that we have all seen since.

    I’m not an economist – I just find it tiresome when people who basically don’t understand what economics is, or what economists do, take it on themselves to criticise it.

  • Dave

    Greenflag, it isn’t rocket science: an economy must set its interests rates in accordance with specific criteria. As Ireland has surrendered control of its monetary policy to the EU, it was unable to set its own interest rates to appropriately control its economy. The result of that lack of applicable sovereignty is that people were supplied credit at interest rates (set by the European Central Bank) that were much lower than the underlining dynamics of the Irish economy could justify, and that the people borrowing that money could not afford to repay in real terms. Davy Stockbrokers pointed this out in 2005 and corrected predicted what the result of this surrender of sovereignty would be:

    “All of which poses the important question: at what level would the key policy rate stand if the Central Bank of Ireland still had control over it? The simplest way to estimate the appropriate policy rate for Ireland is to use the Taylor rule. It specifies that the real policy rate reacts to two crucial variables: deviations of inflation from its targeted level and deviations of real GDP from its long-run potential. The rule sets the nominal policy rate equal to the rate of inflation plus an equilibrium real interest rate and the weighted average of the aforementioned deviations. John Taylor found that it neatly described the US Federal Reserve’s decision-making process and it is now widely used by forecasters to estimate the desired level for policy rates.

    We make two adaptations to the rule to suit our purpose. First, it is standard practice for forecasters to use expected rather than historic inflation in the equation. That is because Taylor was attempting to explain rate decisions in the past, whereas we are looking at the decision today. Second, we have long maintained that GDP is a misleading indicator for the Irish economy due to the distorted rate of productivity growth in the multinational sector. Instead, we focus on potential GNP.

    The first part of the formula consists of setting the nominal policy rate equal to an equilibrium real interest rate and the expected inflation rate for Ireland. We reckon that the equilibrium real rate of interest (consistent with full employment) is of the order of 3%, a little below the historic real rate in the period up until 1999. Next year, we forecast HICP inflation of2.6%. Adding those rates together gives us a policy rate of 5.6% before any adjustment is made for the deviation of inflation from target and output from trend.

    We assume that an appropriate inflation target for Ireland is 2%. That is not far off the ECB target of “close to but below2%” and in line with that of the Bank of England. As regards GNP growth, we are confident that Ireland will grow in line with trend over the next couple of years and that no output gap exists. We think that a trend GNP growth rate for Ireland is4.5%, a subject we will address in the forthcoming issue of Davy on the Irish Economy. It looks as though the Irish economy expanded at such a rate last year, consistent with an economy close to full employment. (Ireland’s unemployment rate is the lowest in the eurozone at 4.2%.)

    The Taylor rule assigns equal weights to the deviation of inflation from target and output from trend. Inflation will be 0.6percentage points above target, which adds 0.3 percentage points to the nominal rate (as shown in Formula 1 below). There is no output gap so we need not make any further adjustment.

    Putting all of this together, we reckon that an appropriate policy rate for Ireland is around 6%, fully four percentage points above its actual level.

    [b]There is no doubt that an inappropriate policy rate for Ireland is fuelling the booming residential construction sector. Onaway to think about it is to imagine the mayhem that would ensue were interest rates to rise to 6%. Our worry is that an elongated boom could lead to a more severe correction in the housing market when rates finally begin their ascent (to 3% rather than 6%) or when sentiment changes. A return to higher inflation rates may also occur. Private-sector credit is growing at 26% year on year while services and construction wage inflation is back up to 7%. We may well have to rely on another tool beyond our control to keep inflation in check—further appreciation of the currency.[/b]

    [i]Formula 1: Taylor rule calculation for Ireland Jan 05= 2.6% (2005 expected inflation) + 3% (equilibrium real interest rate) +0.5* [2.6% (2005 expected inflation) – 2% (assumed inflation target)] +0.5 * [0 (output gap)] = 5.9%

    Note: Our estimate of the appropriate refi rate for the eurozone – employing the Taylor rule – is circa 3%. Interestingly, a similar calculation for the UK yields an appropriate repo rate of 4.75%. For the ECB and BoE estimates above we use OECD output gap estimates.[/i]”

    – Davy Stockbrokers (part of Bank of Ireland Group).

  • Dave

    Just to bold the pertinent conclusion: “Putting all of this together, we reckon that [b]an appropriate policy rate for Ireland is around 6%, fully four percentage points above its actual level.[/b]”

    Now why was the interest rate for Ireland set 4 points below what it should have been set at? Because sovereignty over monetary policy was transferred from the Irish Central Bank to the European Central Bank, and set by Frankfurt at rates that suit the German economy rather than the Irish economy. Proof that the EU, via membership of the Eurozone, is inflicting one-size-fits-all policies on countries that have a profoundly detrimental effect on them.

  • It was Sammy McNally what done it

    Lafcadio

    re. “socialist cliches” Not sure where you got that from?

    Socialism – Everybody knows it doesn’t work. Capitalism – everybody knows that it does work but nobody can explain how. (A slight exaggeration I grant you.)

    “if only the banks had been stacked with economists.. banks business is not economic analysis, except insofar as they think it affects their profits”

    If this was a deliberate attempt at humour then may I congratulate you on an absoulute cracker. Its a bit like saying the IRA or the British Army were not stacked full of gunmen except for those who shot people.

    re. Publications. I have often picked up the Telegraph ( shows what a good socialist I am ) and read articles by two different economists who directly contradict each other.

    PS Most of the following “income-generators”, “risk-takers” and “bonus-maximisers” will quite likely have qualifications in Economics.

  • Lafcadio

    Sammy – what do you think economics is? It might help clarify things if we were to define our terms.

    A bank’s day job is making profits. Their strategy will be informed by economic analysis at a high level, and many banks have very credible economics departments. But the strategy is implemented on the ground by people who may understand economics, but who are incentivised by target-driven rewards. And in some cases, eg the residential mortgage-securitisation-CDO machine in the US up until last summer, the people involved in these markets are complicit in ‘feeding the beast’, even as observers (including economists) point out the problems building up – and even if they themselves, if they were to view the situation dispassionately, would accept that this was the case.

    Far from cheering on the big banks, the Economist has been pretty tirelessly talking up the risks building up in finance, and property bubbles etc for years now. Have a look at some back issues if you don’t believe me.

    But it’s possible to have a good understanding of economic theory, but to fail to see the bigger picture when you’re at the ‘front line’ in one market or another – and also when you have a big bonus dangled in fornt of you. And most people working in financial services won’t have degrees in economics, albeit the majority will have a good grasp of economic theory, certainly in managerial positions in the larger banks.

    It’s not uncommon for econmists to contradict each other – despite a seemingly commonly-held view on the left that they are homogeneous free-market fundamentalists, and your view that they’re seemingly cheerleaders and shills for the big banks, it’s a field that is characterised by a an extremely lively (and increasing, thanks to the internet) level of debate and discourse.

  • runciter

    Dave,

    It may be convenient to pretend that the government’s influence over the economy is limited to the setting of interest rates, but it is not correct.

  • Greenflag

    Dave ,

    ‘it isn’t rocket science’

    I did’nt say it was. Neither is human nature. Economic behaviour is not always predictable and although it may have looked like Chairman Greenspan had everything under ‘control’ as he applied the ‘Taylor Rule ‘ or an approximation of it -there are now many in the USA who question his ‘former wisdom’ .


    ‘It specifies that the real policy rate reacts to two crucial variables: deviations of inflation from its targeted level and deviations of real GDP from its long-run potential. The rule sets the nominal policy rate equal to the rate of inflation plus an equilibrium real interest rate and the weighted average of the aforementioned deviations. John Taylor found that it neatly described the US Federal Reserve’s decision-making process and it is now widely used by forecasters to estimate the desired level for policy rates.’

    Very impressive 🙂 I wonder why then is the USA in such a financial mess with Bernanke not knowing which way to turn and Freddie Mac and Fannie May on the verge of nationalisation ?

    So it’s out with Adam Smith’s invisible hand of the free market and in with the John Taylor rule ?. Or is it to be a combination of both for the perfect answer/answers to the current and future crises ? John Taylor may have been impressed with Mr Greenspan a.k.a Dr Bubbles ( Stock & Property Bubble Supremo) however the rest of us need only to look at the huge numbers of high finance corporate swindlers of pension funds , the long list of buddies of the Bush administration and others behind bars -the growing emisseration of the American middle and working classes and the huge and ever widening income disparities to know that there is more than just something rotten in the State of America . The ‘application’ of your putative ‘ Taylor Rule’ approximate did not forestall the current American economic downturn /recession nor the stock market nor property bubble bursts nor did it stop the modern day Ponzi Schemes of derivatives and hedge fund merchants from looting wherever they could find an opening in an underregulated financial sector .

    ‘As Ireland has surrendered control of its monetary policy to the EU, it was unable to set its own interest rates to appropriately control its economy.’

    Along with many other countries. We knew that when we joined the Euro. I don’t see or hear any popular outcry to restore the ‘punt ‘ .How is the UK doing outside the Euro by comparison – better or worse or the same ? All of the Euro economies save from anything between 6 to 10% on currency exchange commissions on transactions between them . Presumably the ‘financial services sector ‘ miss their ‘commissions’ ? Not to worry they can still ‘pillage ‘ the UK consumer or businessman who has to add on the exchange costs every time he ‘travels’ or does business in the EURO zone . And while on the UK how exactly has British Pound Sterling ‘Sovereignty’ helped the British to avoid the property market downturn in the UK? Not much from I’m reading or hearing .

    As you point to Germany as the culprit have you ever looked at a comparison between the German economy and the USA’s in terms of the former’s ability to retain of much of it’s strategic niche industries whereas the USA not only has outsourced entire sectors to China and elswhere but as we approach this final highpoint achievement of a disastrous 20 year policy trend they are now outsourcing ‘financial services sector ‘ jobs . Look at the comparison in Health Care , Social Security and across any number of areas and you will see why we might prefer to follow the German example. There is more to an economy and a society than ‘interest rates’ . But not according to the ‘stockbrokers’ and the money men eh ?

    What was it that Warren Buffett the Nebraskan said some years ago of the undue power now in the hands of the ‘money men ‘ of Wall St with their ‘derivatives ‘ and all manner of sophisticated ‘mathematical ‘ formulas computed to both bamboozle and then steal from the American investor – I remember it now .

    ‘Now those are what I call REAL WEAPONS OF MASS DESTRUCTION ‘

    Buffett got it right- which could be one reason why he is supporting the Obama campaign not that Obama is trumpeting too loudly that he’s been supported by the USA’a second wealthiest individual .

  • Greenflag

    runciter .

    ‘It may be convenient to pretend that the government’s influence over the economy is limited to the setting of interest rates, but it is not correct. ‘

    Dave’s ‘bete noire’ is the evil EU and a little disguised Germanophobia . Any stick will do even if it’s a pretend one 🙁

    Europeans from the Atlantic to the Urals and from Sardinia to Scandinavia if they had to choose between either George Bush or Angela Merkel (German Chancellor ) to lead their nations would choose the German Physicist over the Texan born again Cowboy by 500 million to maybe 4 🙂

  • Greenflag

    Lafcadio,

    Good common sense points and nobody would dispute the neccessity for banks to make profits nor for economic theoreticians to differ . The present financial ‘crisis ‘ results not just from the present round of peccadillos from the financial services sector (banks , stock brokers , mortgage brokers etc etc ) but from the longer term ‘financialisation ‘ of the American economy since the 1980’s . Once more profits were made in financial services (everything from credit card fees /penalties to subprime mortgages to bank charges etc etc ) than were made in manufacturing or the primary sector then the balance of political power in the USA moved to the ‘money men ‘ . These in turn have used all kinds of sphisticated financial tools during both Democratic and Republican administrations to promote their interests with their eyes firmly fixed not on the good of American society at large but on the interests of their sharelholders and even more so on the bonuses of their CEO.

    ‘Failing to see the bigger picture’ was not just confined to the individuals raking in the million dollar incomes but extended beyond them to the top echelons of Wall St and some would now say even unto the Federal Reserve Board where you would think the bigger picture might be more of a concern.

    This crisis also demonstrates to the wider American public the failure of their elected politicians of both parties to put the people’s interest before that of the financial services sector ‘lobby ‘ . What impact this will have on the Nov election is not yet clear but we can expect it to have no little significance imo.

  • Greenflag

    Harry Flashman –

    Go read Kevin Phillips ‘ American Theocracy’ . The numbers are all in there. And no he’s not a left wing nut job . In fact he was a former Bush strategist .

    As Phillips says, oil , religion and finance are not new elements in US politics . He makes clear with his command of facts , figures and history as well as his long experience as a political strategist that the Bush ‘coalition’ has resulted in both a dearth of candor (excess of lies) and a failure of strategy- a paralysis of policy and a government unable to govern . If left unchecked the same forces (oil, religion and finance) will bring a preacher ridden , debt bloated , energy crippled america to it’s knees .
    The depth of American ‘misgovernment ‘ is something which many Europeans are unaware of !

    The only people left in the USA still supporting Bush are the 30% i.e the poor benighted ignorati of the ‘born agains ‘ Not surprisng I suppose as was’nt Dubya himself a ‘born again’ having been delivered from the demon drink by his mentor Jesus ?

    The latter however seems to have deserted Dubya almost since he took office . Wonder why ?

  • Driftwood

    Kenny Ley was the son of a Baptist preacher.
    For those who have not seen it, may I recommend the DVD “Enron- The Smartest Guys in the room” for a succinct and breathtaking view of American capitalism.

  • runciter

    may I recommend the DVD “Enron- The Smartest Guys in the room”

    I’ll second that. The stuff about the California electricity market is astonishing.