Fiscal compact and bijou.

Why not just call it a pact? Then they could cut their palms with a dagger (good German steel of course) and sign in blood. Seems more fitting while signing away the last of a nation's sovereignty.

This started out as a response to Dermot Frost's post explaining the contents of the compact but since I want to share some of this anyway and it got a tad long, I made it a post in its own right.

Does it attempt to explain how if these rules had been in place we wouldn't all be boned right now? Because there's absolutely no connection in Ireland's case.

The "correct" solution involves counting private debt as well as public debt since it's always private debt that's involved in a Bubble. We were model ECB citizens right up to the end, until the shnitzel hit the fan, we didn't breach the rules of the Stability and Growth pact (Germany totally did). We probably didn't even go outside the new limits, although I haven't checked (wikipedia has all the numbers).

Chances of private debt being counted are ≤ 0, maybe for good reasons but then what's this compact for? Italy and Greece?

Also, what's the benefit for us in getting ESM support? Without it, we'd still be in the euro and default would be unacceptable (to Germany). Cynical as it is, that's our trump card (our even trumper card was when the debt was still private but we swapped that for a stick of gum and a pat on the head).

If we default we become lendable again. Our market rates only went nuts when we took on all that debt and became an obviously bad bet. We'd still need to ditch the Croke Park agreement but that would be easier in a default situation too.

And if we didn't have ESM and we don't default then we might be forced to drop Croke Park too. Win-win.

Eddie Hobbs links to a very interesting paper. It explains how Euro central banks operate (there's a weird exchange of Irish Euros with German Euros and stuff) but also a very interesting argument about Germany.

I already think that Germany got the interest rates it needed and we got screwed as a result so they owe us. But this points out that Germany has done exactly what China is criticised for. It pegged its currency to another (or an aggregate of others) and was able to stay grossly undervalued for years.

I bet an economist could "prove" that both my grievances are mathemtically equivalent in some economic model.

The paper also quotes from the Maastricht treaty that set up the Euro which has various bits recognising the need for solidarity and mutual support in a currency union. Which is not surprising given that booms and busts, especially in smaller countries were going to unavoidable.

I'll read the whole doc at the weekend but if I was going to be in the country, I think I'd be voting no.

Independent nonsense: banks should be lending to house buyers

So, house prices are way down but the silly banks aren't lending. As usual the Independent leaves out half the story.

The monthly cost of a mortgage (and so the ability to repay it) is determined by the price times the interest rate. Interest rates for Irish borrowers are about twice what they were.

Our interest rates used to be a little above the ECB but now they're massively above it. There's a double reason for this. Irish banks have to pay lots more for their credit now, they can't get it at ECB rates anymore. So they have to charge people what the bank is paying plus a margin for profit.

Secondly, the banks sold a load of tracker mortgages which means that for all those customers, not only are they not getting to add a profit margin, they are actually charging those customers less than what it costs the bank. The result is that they have to add an even bigger profit margin on their non-tracker loans. Yes, if you don't have a tracker not only are you not as well off as those who got a tracker, you are actually being charged extra because of them!

The only mention of "interest" in that whole article is for the buyers who are "interested" in the properties.

So should the banks be lending? I had no idea before I read that article I have no better idea afterwards.

Independent nonsense: balance of payments

Am I missing something or is this article contradicting itself in the space of a single paragraph?

Our export-led growth has given us a positive balance of payments position on current account. Depressed consumer demand has helped keep our spending down on imports. So we don't owe as much as we might. The real problem impeding a fuller economic recovery is that consumer confidence and domestic demand have not bounced back. The positive balance of payments will be short-lived if domestic demand does not improve.

So on the one hand depressed consumer demand has kept our imports low and so our balance of payments is positive. Yet somehow, our balance of payments will become negative unless consumer demand increases.

While I agree with some of what he says, the whole article has the feel of a random collection of assertions and opinions about the crisis cogged from others.

What are Amazon doing?

I just bought a book. It cost be £9.49 from Book Depository. Shipping is included in their price. Before buying it, I checked Amazon's site. They wanted £8.43 but they also wanted £4.98 to ship it to Ireland! The book was eligible for "super saver shipping", so if I was buying more than £25 worth of books, the shipping would be free but I wasn't so that's beside the point.

If Book Depository can do the whole thing for £9.49, there's no way on earth it is actually costing Amazon anything close to £4.98 to ship 1 book to Ireland. So I really wonder what's going on. Are they trying to discourage single-item purchases? Are they ripping off the Irish (why leave that to the Irish?) Does it really cost them that much to ship a book? Is Book Depository losing money on this?

I'd love to know what's really going on. I sent them a mail. I already bought the book from Book Depository but I figure there's no harm in encouraging some competition.

I declare July 5th to be Dependence Day.

I spent July 4th in Mountain View, California (I'm visiting head office for two weeks). Apart from a very cool doodle on the Google homepage and hearing some fireworks as I sat in my apartment, it was just like any other weekend day I've spent in sleepy Mountain View. The official day off is tomorrow, so nothing was closed or out of the ordinary.

The name of the day got me thinking though. These days, the USA is no more independent than most countries, in fact it (and most other countries) are far more dependent now than ever before. So I am declaring July 5th to be Dependence day.

On this day we can celebrate (well maybe just acknowledge) our dependencies. First off, our dependence on brutal governments around the world to keep their people living in poverty and unimaginable pollution while selling us oil and raw materials at knock-down prices (hello Nigeria). And on countries that are exporting minerals stolen from their neighbour, mined by children and slaves, with all the care and humanity you would expect from such operations (Congolese coltan in your mobile phone).

We should also acknowledge the governments that make sure their workers cannot meaningfully organise for better pay and conditions. Like China, where any unions are run by the company and the state and not the workers. This article about a recent strike indicates that things may be changing but it includes this gem near the bottom

Many workers are asking for independent collective representation. Unions in China are usually funded by companies, staffed by management and answerable to the Communist party. During an earlier strike at the Honda plant in Zhongshan, union representatives fought workers, injuring two of them.

That sure is a militant union.

Without this setup we couldn't possibly have DVD players for €20 and other electronic devices that are cheaper to replace than to repair (e-waste is itself a massive problem, I'm not sure if ifixit.com is really the answer but fair play to them for trying). And of course all the cheap plasticky crap that we don't really need or want but end up with anyway. Stuff that may eventually make its way to the North Pacific Gyre and from there perhaps into the stomach of a soon-to-die albatross chick

As well as material dependence there is psychological dependence. Living in Ireland, I get to be relatively happy with my government's record on human rights and such-like. I'm not too happy with the US military planes landing at Shannon on their way to Iraq but we have a foreign minister that has attempted to visit Gaza and many TDs (in and out of government) who speak out against Israel's occupation and other issues. I get to rail against the US, UK, French etc. governments for their part in the exploitation of various people and places. If I don't think too hard about the origin of the things I buy, the power I use and the forces that keep the whole modern world ticking over, I can keep my conscience clean most of the time and I really couldn't do that without those foreign governments or for that matter the Irish government. Although it isn't directly involved, my government happily lies down with those who are, while only making a fuss about the more obvious bad-actors.

Happy Dependence day everyone.

Post Script

After writing all this I did a Google search for "dependence day", figuring someone had probably beaten me to all of this. I was half right. On the first page at least, all I could find was various right-wingers decrying the lack of independence within the US, the "over-reaching", "over-regulating" "nanny state", the dependence on health care and how the founders would be sick if they could see us now, blah blah. The usual libertarian guff. It makes me think of this video. So while I doubt this is really an original thought, it doesn't seem to be a common one.

Some thoughts on Ireland's financial woes.

This letter was a bit surprising. The guy complains that the govt didn't have a plan to prevent overbuilding of hotels. What he seems not to realise is that the hotels were built as a direct result of govt tax breaks. Not only was there no plan to prevent overbuild, they actively encouraged it. It's odd that someone who can put together a letter to the paper wouldn't know that.

One of the worst things about Ireland's problems is that it's not just public debt. Some countries have bad governments that run up massive public debts but not only do we now have the massive NAMA debt and massive yearly deficit, our government created a massive private debt through tax incentives and planning for developments of hotels, leisure centres and housing estates that are now lying empty and even those that are occupied (many privates houses) are depreciating rapidly. It didn't just bankrupt the state, it bankrupted the citizens too.

The EU puts borrowing limits on member states, the idea is to prevent governments borrowing massively and unwisely. It puts no such restrictions on private debt. By encouraging massive private borrowing and then taking a cut via VAT, stamp duty and other taxes, this government was able to get its hands on far more borrowed money than EU borrowing limits allowed. At the same this money cost far more as the govt only took a small cut of what was borrowed. We'd have been better off as a country if the govt had borrowed it up-front while the people stayed solvent.

I really doubt that anyone in govt thought of it as a way of circumventing EU rules. They found a button they could press that made money come in and they kept pressing it without any regard for the consequences. Just like the rats that pressed the "pleasure" button to the exclusion of everything else, eventually dieing of exhaustion. We should probably be thankful we didn't get an extinction burst!. That said, the car scrappage scheme is just another way to encourage Irish people to borrow so that the govt can take a cut. Again, it'd be a whole lot cheaper if the govt just borrowed the money itself without Irish consumers borrowing it at commercial rates and lining the pockets of foreign car manufacturers. Not quite an extinction burst, more like the rat finding a new button it can push.

So why did it happen? Never attribute to malice what can be adequately explained by stupidity. Given that some of the architects of our current woes bought property at peak prices - Mr Cowen at Leeds University, Mr McCreevy at the K Club (now worth almost one million euro less than he paid) and presumably lots of others who got fast track loads from Fingers Fingleton it seems that while there was an element of malice - well avarice I suppose - stupidity was the overriding factor. Unless these property losses are just a smokescreen, these guys had no idea that this was a bubble that obviously had to burst, right up to the end.

Which brings me to the sad conclusion that we are still boned. The people leading us out are those who led us in. They had no clue what they were doing then, they don't even seem to get what the problems were - Pat Gallagher still thinks cheap credit from the ECB was a great thing. There is no evidence that they suddenly have a clue now.

If the whole disastrous boom had been a clever scheme to line their own pockets, then, at least, I'd have to have some respect for their ability, if not their character. I might believe they could cook up a scheme to help the country recover, although I might not trust them to implement it. Instead, whatever pocket lining they managed to do was purely due to being in the right place at the right time and of course some political cleverness. I'm not sure whether we'd be better off with an honest idiot or a clever gangster.

Eddie Hobbs and the car scrappage scheme.

Update:Eddie's reply is at the bottom

Lots of good things in this post but I'm surprised to see positive mention of the car scrappage scheme - "Focus on energy efficiency, green energy and a cash- for- clunkers scheme for low emission cars.". It is neither green nor good for the economy.

We don't have a car industry, we have a car sales force which funnels money straight out of this economy with a small bit staying locally. Stimulate this and you stimulate the Germany and Japanese economies far more than the Irish.

Scrapping cars that have plenty of life left just to have them replaced with something that is maybe 10% less emitting is going to cause a net increase when you factor in the manufacture of the car. Never mind that fact that some will upgrade their cars to bigger, more-polluting models.

Given all that I'm curious why Eddie thinks it's a good idea. he makes a virtue of not being beholden to vested interests so it's unlikely he's saying it for his mates in the motor trade. There are ways to spend the scrappage money that would produce a greater economic stimulus in this country and produce greater environmental impact per euro too.

I sent Eddia a link to this and he replied quite quickly which is very good of him. He said

Yeah, you’re right to pick me up on it. Technically it’s the wrong thing to do since we don’t have a car manufacturing industry but that is softened somewhat by the emphasis on Band A and B. It is, of course, front-end loading cars sales but the x factor is the sight of 2010 new plates on the road, car rooms with consumers in them and a lift in consumer morale. Very hard to measure I know and a subjective call but morale is pretty important to arrest the spending delay factor caused by deflation. Much will depend on the relative allocation to energy, efficiency etc where we’ll get a proper return so let’s see at teatime.

to which I say, hmmm... maybe. One small snag here is that these newly confident consumers just blew all their money on a new car so although they feel good, they're less likely to do anything as a result...

in reference to: Ten things Brian Linehan must get right (view on Google Sidewiki)

Pat, "the cope" Gallagher: dishonest or just an idiot?

In his letter to the Indo calling for a "yes" to Lisbon, Pat defends our membership of the Euro. I think there are upsides and downsides to it but for Pat even the downsides are upsides. He happily points out that

The eurozone has ensured that billions of euro have been made available to Irish banks via the operation of the European Central Bank.

and that

As a member of the eurozone, Ireland has benefited from very low interest rates, notwithstanding the very difficult economic situation that faces us.

Surely he must know that these 2 things are the root cause of our massive bubble. The IMF and even Brian Lenihan have said as much. So if he knows this, then to list them as upsides of eurozone membership is basically swearing that black is white and up is down. There is of course that odd "notwithstanding the very difficult economic situation that faces us" which seems to be an attempt to cover all angles - as if to say "yes I know this is what fucked up the country but still it was great craic at the time."

Of course maybe he truly disagrees with me and thinks that the oversupply of cheap credit was an entirely positive thing and we should be thankful for it. This would certainly be compatible with FF's policy over the last decade, right up the point where the shit hit the fan.

The real reason for bailing out Anglo Irish bank.

I like Gene Kerrigan's articles in the Sunday Indo. He had 2 recently: "Servile surrender sowed seed of doom" and "Saving economy while people go down" which deal with our governments obsession with saving Anglo Irish Bank and the others at the expense of absolutely everything else. Why this is happening is a really important question. He makes a lot of sense but he seems to think that the govt are simply mesmerised by the bankers, "deferential and submissive" just as they were in the past to the church. He makes it sound like the govt is just in awe of these guys and willing to do whatever they request - the same way some politicians seem to be in awe of the "free market" and espousers free market ideology. I actually don't think it's that simple (I doubt Gene Kerrigan does either).

Mr Kerrigan says that we should let Anglo go to the wall and let the bond holders take the hit. The argument is that they gambled, they knew the risks and they lost - there is no reason for the Irish government to cover their bet. The problem here is that when they placed their bet, they were ostensibly betting on regulated a bank in a modern, Western, open democracy. As such, on paper, their risk was low and their rates of returns would have been low too (I haven't checked the rates...). On paper, such a bank, regulated by a well run EU member, should never go bust. The problem is that there was no such regulation, worse still there may even have been collusion between the bank and the regulator. For the government to then say "sorry boys you lost, thanks for playing" raises some problems. These bond holders would certainly not be happy with that and would presumably draw even more attention to the misdeeds of the bank and the regulator, possibly even taking legal actions (I have no clue what recourse they would have) and at the very least making it very hard for AIB, BOI and the other to raise capital as they were and still are under the same crappy regulatory system.

The whole thing is a bit like cheating at poker in a gentleman's casino. Ireland sat at the poker table and won hand after hand. It won because it was cheating - it didn't regulate its banks properly. Come the end of the and by now everyone knows Ireland was cheating and Ireland realises that they know. Of course "gentlemen" don't like to bring up this sort of thing in public, it's impolite. Ireland has 2 choices:

1. it can pretend it didn't cheat, leave the casino with its winnings - in this case it will be black-balled and no one will ever play poker with Ireland again. The genetlemen might then abandon their usual decorum, call out the cheating directly and look for their money back.
2. it can say "what a splendid evening we've all had" and leave its winnings on deposit in the casino's safe, then come back and play a losing game every night until it has lost enough to repay it's cheating debt plus interest.

Gene Kerrigan is calling for #1, this government is doing for #2.

The good news is that finance is not the same as poker. There is a third option. We can do #1 and also avoid being black-balled and banned from every table if we can convincingly promise never to cheat again. We must acknowledge the wrong doing, punish the wrong doers and put in place legislation and regulators with real powers. They must not be mates of the politicians or the bankers and they must be willing to remain adversarial. No more jobs for the boys. Without this step, #1 would be extremely dangerous for all Irish banks. That still leaves us open to attempts to recoup our ill gotten gains but the worst that can happen is we end up paying them all back, just as in #2 except.

The bad news is that Fianna Fáil certainly don't have the balls to do this. They are much happier to take #2 whereby everybody remains gentlemanly, nobody loses face and the tax payer picks up the bill (to a large extent it was the tax payer who benefited but it will not be those who benefited most who end up paying back the most). I don't believe that any of the other parties have the balls to try it either or to even contemplate it, they don't want to rock the boat and they have all shown that jobs for the is what its all about.

Incidentally, I don't believe the bond holders were dummies either. I imagine they knew how poorly regulated the bank was. However knowing that the government would feel forced to save them, they could make their bets based on the imaginary state of regulation, not the real state of it.

Letter to the editor: Confused about Lisbon Treaty

Looks like I forgot to post this letter on the blog. It was published a few days after I sent it. There was a reply and I followed up. Feels like I end up writing a letter every night when I get home from work!

I need some help on the Lisbon Treaty. Apparently we have to vote Yes or foreign businesses will stop investing in our country. They wouldn't do that if there weren't good business reasons.

So could someone please tell me what exactly in the Lisbon Treaty will make Ireland more attractive to foreign investment but will not make other EU countries equally more attractive?

If your answer involves phrases like "Ireland at the heart of Europe" please keep it to yourself, I've read enough of that already, 

Letter to the editor: Lisbon treaty and competitiveness

Sir,

Paul Nolan thinks I missed the point with my question on the Lisbon treaty  (letters April 2nd). I did not. I asked a very focused question in an attempt to get a waffle-free answer and it worked. Thank you.

Mr Nolan tells us that Ireland's competitiveness versus other European countries will not be changed by the Lisbon treaty. We will still be the highly-educated, English-speaking, low-tax, gateway to Europe even if we vote "No".

With that question resolved, I would like to ask the other half of the question. What exactly in the Lisbon treaty will make Ireland and Europe more attractive for foreign investment versus the rest of the world.

Mr Nolan raises this issue himself and says, "the Lisbon Treaty includes a number of specific provisions" to make Europe "a better place to invest and do business". However he does not say what they are.

It is exactly this kind of answer, a serious sounding statement but no details, from the "Yes" campaign that has driven me to ask such narrowly focused questions.

As before, waffle-free answers please. Being "at the heart of Europe" might give politicians a warm fuzzy feeling but I suspect it doesn't do much for the shareholders of large companies,

Update: there was a pretty poor reply to this to which I have responded.