Economic Crisis Part 2 - The Sucker Punch (Morgan Kelly predicts a run on the banks)

Fitzcaraldo

Fitzcaraldo wrote: »

An economist is someone who can tell us tomorrow why the prediction he made yesterday didn't come true today. They are as reliable as met eireann.

I do worry about the country though, between malcolm o'kelly lecturing on the economy and a PHD graduate with a big 4 accounting firm not knowing what would happen if the country went bust, we may be in trouble

Rubbish you have been listening to the wrong economists....
people paraded in front of TV during the boom as "experts" dont count
Estate agent, government, bank and stock broker economists always have a vested interested

Wise up to who you listen to - economics is a science based on maths the US used game theory at command level to fight World War 2. Economics is proven - PR is PR dont mix em up

Banned Account

Deleted User wrote: »

Rubbish you have been listening to the wrong economists....
people paraded in front of TV during the boom as "experts" dont count
Estate agent, government, bank and stock broker economists always have a vested interested

Wise up to who you listen to - economics is a science based on maths the US used game theory at command level to fight World War 2. Economics is proven - PR is PR dont mix em up

Hold up on the vitriol there dear boy. I am aware that there have been a few consistent analysts - look at Stigliz and Roubini for example - there problem with these is that they got it wrong for a number of years before they ever got it right.

Any good economist will acknowledge the fact that there are far too many variable to allow for 100% accurate forecasting. Just because something is a science does not mean that it is an exact science. Game theory is based on rational choice - it isn't economics by any stretch of the imagination so it's importation into the argument is unhelpful.

One main factor which makes economics so unsuited to accurate prediction is that fact that the markets are often irrational and driven by human emotion. I am fully aware of the difference between PR and economics, but if your argument was even silightly in danger of being correct, you would have to account for the wildly differing views held by left and right wing economic theorists.

Amhran Nua

Fitzcaraldo wrote: »

One main factor which makes economics so unsuited to accurate prediction is that fact that the markets are often irrational and driven by human emotion. I am fully aware of the difference between PR and economics, but if your argument was even silightly in danger of being correct, you would have to account for the wildly differing views held by left and right wing economic theorists.

Economics aren't used to predict the vagaries of the market (stock markets are one factor of many in economics), and left and right are political positions. In reality economics is mostly the neoclassical synthesis along with various flavours of other theories mixed in.

One that was on the rise until recently was Greenspan's invisible hand, market will regulate itself, idea, which led directly to the ruinous situation we are in today (see repeal of the Glass-Steagall act for more information). Now more conservative and pragmatic ideas are taking hold, particularly in European circles, and long may they last.

johnnyskeleton

Deleted User wrote: »

Rubbish you have been listening to the wrong economists....
people paraded in front of TV during the boom as "experts" dont count
Estate agent, government, bank and stock broker economists always have a vested interested

Wise up to who you listen to - economics is a science based on maths the US used game theory at command level to fight World War 2. Economics is proven - PR is PR dont mix em up

I half expected you to break into some 1980s educational rap song there.

Sand

FCKD how?
Whaddya mean FCKD?
You mean like in Africa FCKD?

If the state was to go bankrupt it would have to default - this would mean going to the people we lent money to and saying "You know that 100 billion you gave me? Funny story really..."

Those people would then be unwilling to give us more money (though who knows, it might really have been a funny story). Essentially the state wouldnt be able to borrow at anything other than horrific rates of interest, so it wouldnt be able to fund a deficit. It wouldnt be able to print money in the Euro to fund the deficit either via Weimar era inflation. So two things would happen:

1 - Rapid exit from the Euro, with resulting capital flight as everyone rushes down to get their Euros out and convert them to something that will hold value more than new punts and hyperinflation as the government printed punts morning, noon and night, destroying the wealth of private citizens.

2 - And/Or cutting 20 billion out of the budget in a matter of weeks. Followed up by more cuts later. That would be on the back of teachers, guards, firemen, civil servants not getting paid. Government contractors not getting paid. Social welfare not getting paid.

The quickest way to cut the deficit would be to halve pay, halve social welfare and so on. People either get thrown out of their houses when they no longer meet their mortgage repayments, or forcing the banks to take the losses, which would certainly wipe them out (assuming they hadnt already been wiped out by the capital flight sparked by the plans to leave the Euro).

It would be a massively destabilising period. Like "Grab your shotgun and head for the hills" type period. We very, very definitly do not want a state default. Which is why the way were sleepwalking into one by taking on the epic losses of our insolvent banks is mystifying.

George Orwell 1982

Sand wrote: »

If the state was to go bankrupt it would have to default - this would mean going to the people we lent money to and saying "You know that 100 billion you gave me? Funny story really..."

Those people would then be unwilling to give us more money (though who knows, it might really have been a funny story). Essentially the state wouldnt be able to borrow at anything other than horrific rates of interest, so it wouldnt be able to fund a deficit. It wouldnt be able to print money in the Euro to fund the deficit either via Weimar era inflation. So two things would happen:

1 - Rapid exit from the Euro, with resulting capital flight as everyone rushes down to get their Euros out and convert them to something that will hold value more than new punts and hyperinflation as the government printed punts morning, noon and night, destroying the wealth of private citizens.

2 - And/Or cutting 20 billion out of the budget in a matter of weeks. Followed up by more cuts later. That would be on the back of teachers, guards, firemen, civil servants not getting paid. Government contractors not getting paid. Social welfare not getting paid.

The quickest way to cut the deficit would be to halve pay, halve social welfare and so on. People either get thrown out of their houses when they no longer meet their mortgage repayments, or forcing the banks to take the losses, which would certainly wipe them out (assuming they hadnt already been wiped out by the capital flight sparked by the plans to leave the Euro).

It would be a massively destabilising period. Like "Grab your shotgun and head for the hills" type period. We very, very definitly do not want a state default. Which is why the way were sleepwalking into one by taking on the epic losses of our insolvent banks is mystifying.

I don't think it would come to this even in the worse case scenario. What Morgan Kelly was saying was that if we keep going as we are we will end up being unable to borrow on international markets, therefore we will have to avail of the EU bailout fund. The EU will bail us out to save the euro but they will impose very tough conditions. So yes there would be an austerity package, and we would have to pay reparations for the next 20-30 years of some small percentage of national income. Its possible the EU could also insist on the harmonising of corporate tax rates. We would have to accept these terms or go to the IMF who would really crucify us.

Its not a good situation but according to Morgan Kelly that is where we are heading.

Exit from the Euro is not really an option at all. Colm McCarthy blogged about this the Irisheconomy blog: http://www.irisheconomy.ie/index.php/2010/03/27/leaving-the-euro/

Banned Account

Amhran Nua wrote: »

Economics aren't used to predict the vagaries of the market (stock markets are one factor of many in economics),

I don't think I mentioned the stock market - I was referring to the broad financial markets as a whole.

Amhran Nua wrote: »

and left and right are political positions.

I am aware of this, but surely the fact that one can take a radically different view based upon one's political leanings would indicate that economics is not the strict scientific discipline that blindjustice holds it out to be?

Amhran Nua wrote: »

In reality economics is mostly the neoclassical synthesis along with various flavours of other theories mixed in.

This makes no sense to me

Amhran Nua wrote: »

One that was on the rise until recently was Greenspan's invisible hand, market will regulate itself, idea, which led directly to the ruinous situation we are in today (see repeal of the Glass-Steagall act for more information). Now more conservative and pragmatic ideas are taking hold, particularly in European circles, and long may they last.

What we are really seeing is a return to robust regulation as the markets have proven that they are not capable of regulating themselves. However, regulation alone will not solve the issue and it seems that we will need to see significant structural changes in the way we conduct our financial affairs as countries.

Banned Account

George Orwell 1982 wrote: »

Its possible the EU could also insist on the harmonising of corporate tax rates. We would have to accept these terms or go to the IMF who would really crucify us.

could be wrong on this, but I am of the opinion that the EU has never mooted this idea, futher the treaty bodies do not permit the EU to make decisions in the area of member states fiscal policies. They have been talking about harmonising the corporate tax base, which is a seperate issue and one which may weel find favour in the future.

George Orwell 1982

Fitzcaraldo wrote: »

could be wrong on this, but I am of the opinion that the EU has never mooted this idea, futher the treaty bodies do not permit the EU to make decisions in the area of member states fiscal policies. They have been talking about harmonising the corporate tax base, which is a seperate issue and one which may weel find favour in the future.

Morgan Kelly suggested it could happen in his article and that is why I mentioned it. I know the Germans and French would like to see it happen and since Ireland is the main objector they could make tax harmonisation a condition for a bailout. I don't know legally how this would all work, its just another threat there in the background.

George Orwell 1982

Amhran Nua wrote: »

Can you remind us again how the people in government got to be in charge of the country. This far left headbangers mantra might fly in places like Greece and Spain where they are well entrenched, but we like a little more realism here on this side of the continent. Or at least we do these days.

The government was elected by the people. But when a country goes bankrupt the country effectively loses its sovereignty and it must accept whatever policies the markets decide are appropriate. This would effect everyone in the country, unions included. Everyone would have to accept whatever policies the IMF/EU set out in exchange for a bailout. You can take the elected govt. out of the equation as they would just rubber stamp the deal. Therefore it is more appropriate to say markets versus people as opposed to elected govt. versus unions.

Amhran Nua

Fitzcaraldo wrote: »

I don't think I mentioned the stock market - I was referring to the broad financial markets as a whole.

Not a whole lot of difference to be honest.

Fitzcaraldo wrote: »

I am aware of this, but surely the fact that one can take a radically different view based upon one's political leanings would indicate that economics is not the strict scientific discipline that blindjustice holds it out to be?

Eh no, that just means you're doing it wrong and using economics as a vehicle for your own particular brand of dogma.

Fitzcaraldo wrote: »

This makes no sense to me

Thats the scientific part you weren't aware of.

Fitzcaraldo wrote: »

What we are really seeing is a return to robust regulation as the markets have proven that they are not capable of regulating themselves. However, regulation alone will not solve the issue and it seems that we will need to see significant structural changes in the way we conduct our financial affairs as countries.

I'd agree with this.

Amhran Nua

George Orwell 1982 wrote: »

You can take the elected govt. out of the equation as they would just rubber stamp the deal.

No, you can't. It will be government workers and government employees who enact the deal, and politicians who agree on it. "Loss of sovereignty" means nothing at the end of the day unless you've actually been invaded and occupied. So if things get that bad, and its a big if, we'll be left with the government (presumably with a mandate) et al on one side, and those who don't want to accept needed austerity measures on the other.

Banned Account

Amhran Nua wrote: »

Not a whole lot of difference to be honest.

Yet you went on to give an example about Greenspan favouring the invisible hand of the market

Amhran Nua wrote: »

Eh no, that just means you're doing it wrong and using economics as a vehicle for your own particular brand of dogma.

So any economist who favours either the free market approach or a social based model is wrong and the only ones who are right are those with no views at all?

Amhran Nua wrote: »

Thats the scientific part you weren't aware of.

Don't be so disingenuous, that sentence is gobbledygook - the neoclassical synthesis of what - what is being synthesized?

Amhran Nua wrote: »

I'd agree with this.

Thanks.

George Orwell 1982

Amhran Nua wrote: »

No, you can't. It will be government workers and government employees who enact the deal, and politicians who agree on it. "Loss of sovereignty" means nothing at the end of the day unless you've actually been invaded and occupied. So if things get that bad, and its a big if, we'll be left with the government (presumably with a mandate) et al on one side, and those who don't want to accept needed austerity measures on the other.

Of course the govt. will agree and enact the deal. But its not like they'll have a choice. "You can have your dinner or not have your dinner" kind of choice.

Its not clear that the govt. in Greece had a mandate. They elected a socialist govt. It doesn't matter in that situation. What could the govt. do? If they don't accept and implement the deal there will be no money available.

jimmycrackcorm

George Orwell 1982 wrote: »

Morgan Kelly suggested it could happen in his article and that is why I mentioned it. I know the Germans and French would like to see it happen and since Ireland is the main objector they could make tax harmonisation a condition for a bailout. I don't know legally how this would all work, its just another threat there in the background.

Germany and France could have insisted on tax harmonization when we asked the ECB to back NAMA.

Amhran Nua

Fitzcaraldo wrote: »

Yet you went on to give an example about Greenspan favouring the invisible hand of the market

Its a common expression in the field....

Fitzcaraldo wrote: »

So any economist who favours either the free market approach or a social based model is wrong and the only ones who are right are those with no views at all?

Whats a social based model? The free market approach is definetely wrong though, dangerously so.

Fitzcaraldo wrote: »

Don't be so disingenuous, that sentence is gobbledygook - the neoclassical synthesis of what - what is being synthesized?

Neoclassical synthesis:

Neoclassical synthesis was a postwar academic movement in economics that attempted to absorb the macroeconomic thought of John Maynard Keynes into the thought of neoclassical economics. Mainstream economics is largely dominated by the synthesis, being largely Keynesian on macroeconomics and neoclassical on microeconomics.[1]

The theory was developed by John Hicks, and popularized by the mathematical economist Paul Samuelson, who seems to have coined the term, and helped disseminate the "synthesis," partly through his technical writing and in his influential textbook, Economics.[2][3] The process began soon after the publication of Keynes' General Theory with the IS/LM model first presented by John Hicks in a 1937 article.[4] It continued with adaptations of the supply and demand model of markets to Keynesian theory. It represents incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded.

George Orwell 1982 wrote: »

Of course the govt. will agree and enact the deal. But its not like they'll have a choice. "You can have your dinner or not have your dinner" kind of choice.

The government has choices at every stage. They could choose to take stronger steps now to avoid up and coming problems, but as Kelly rightly says we are sleepwalking ourselves into a worse problem. Still at the end of the day, it won't be the "people" rising up against their capitalist masters as some of the loony left around here would have it, with visions of the Oktober rising floating before their eyes. It will be people who are intent on making the problems worse, as in Greece.

Banned Account

Amhran Nua wrote: »

Its a common expression in the field....

So when I used it, it was the stock market - when you used it, it was a "common expression"

Amhran Nua wrote: »

Neoclassical synthesis:

So, to re-cap then economics is not mainly the neoclassical synthesis, rather modern day economics is a synthesis of the traditional neoclassical school of thought and the work of Keynes.



The government has choices at every stage. They could choose to take stronger steps now to avoid up and coming problems, but as Kelly rightly says we are sleepwalking ourselves into a worse problem. Still at the end of the day, it won't be the "people" rising up against their capitalist masters as some of the loony left around here would have it, with visions of the Oktober rising floating before their eyes. It will be people who are intent on making the problems worse, as in Greece.[/QUOTE]

Amhran Nua

Fitzcaraldo wrote: »

So when I used it, it was the stock market - when you used it, it was a "common expression"

Thats right. Here's what you said:

Fitzcaraldo wrote: »

the markets are often irrational and driven by human emotion

Which is true for stock markets and similar systems, which is clearly where you picked up the reference. The "supply and demand" markets not so much.

Fitzcaraldo wrote: »

So, to re-cap then economics is not mainly the neoclassical synthesis, rather modern day economics is a synthesis of the traditional neoclassical school of thought and the work of Keynes.

I even quoted the article for you.

Mainstream economics is largely dominated by the synthesis

If you want to start using specific expressions from complex and highly involved areas of academic learning, learn what they mean before attempting to denigrate the entire field. As it is, without rancour, I've neither the time nor the patience to educate you further; google is your friend.

Banned Account

Amhran Nua wrote: »

I even quoted the article for you.

No, this is what you said

Amhran Nua wrote: »

In reality economics is mostly the neoclassical synthesis along with various flavours of other theories mixed in.

Not mainstream economics - but economics there is a merked difference.

Amhran Nua wrote: »

If you want to start using specific expressions from complex and highly involved areas of academic learning, learn what they mean before attempting to denigrate the entire field. As it is, without rancour, I've neither the time nor the patience to educate you further; google is your friend.

You were the one to introduce the specific expressions and then revert to being condescending when I picked you up for saying that the entire science of economics is neoclassical synthesis. Your username would indicate to me that I would have little of benefit to learn from you - besides, I would rather any mentor to be able to construct a more accurate sentence.

turly

Madd Finn wrote: »

FCKD how?
Whaddya mean FCKD?

Hey, that FCKD response was a joke (a glib response to a nearly-as-glib question!) But anyway, my feeble sense of humour aside...

If Kelly's 'default' doomsday scenario comes true or even close to true, I'd imagine we'd be looking at a reduction or indeed complete cessation of many public services - ie services the (broke) government can no longer pay for. Reducing or cutting non-critical services first - road/housing repair and maintenance, cultural facilities like libraries, public transport, rubbish collection, etc... and we're already in a fairly crap situation, to put it bluntly.

But there would have to be much more: mass public service layoffs or swingeing pay cuts which will no doubt meet with stuff union resistance; not to mention the necessity to reduce social welfare payments, and public service pensions. Also, would we still be in the Euro? In the private sector, the Irish banks would likely be suffering from a lack of investor/customer confidence... would they even be operating given that they are now owned lock stock and barrel by the broke government? What happens to the private sector which relies on these banks to conduct business? Do the banks even have any investors left?

At this point in our doomsday scenario, we're at my definition of FCKD. Some of your suggestions go well beyond that into BGRD territory... :-)

Edit: just read Sands' response - whoa. Sobering stuff.

Fitzcaraldo

Fitzcaraldo wrote: »

Any good economist will acknowledge the fact that there are far too many variable to allow for 100% accurate forecasting. Just because something is a science does not mean that it is an exact science. Game theory is based on rational choice - it isn't economics by any stretch of the imagination so it's importation into the argument is unhelpful.

One main factor which makes economics so unsuited to accurate prediction is that fact that the markets are often irrational and driven by human emotion. I am fully aware of the difference between PR and economics, but if your argument was even silightly in danger of being correct, you would have to account for the wildly differing views held by left and right wing economic theorists.

Saying game theory isnt part of economics is like saying statistics isnt a part of economics! Its used in stock market analysis too.

The differing views on left and right economics is merely about the distribution of resources.

dynamick

1. MK does not predict a run on the banks. He predicts that they will be nationalised. It is irresponsible for any publisher, including boards.ie to predict a run on a bank as it can become a self-fulfilling prophesy.

2. The substance of MK's article is that the Irish banks will probably face write-downs of 50bn and because the state has guaranteed the liabilities of the banks, that the state will have to pony up the 50bn, thus bankrupting the country.

The problem with this analysis is that the banks would have to fold for these losses to become state liabilities. AIB & BoI are not about to fold.

It also ignore the multi billion euro write downs already announced by the banks in their annual statements to date and the fact that the banks are still massively operationally profitable and capable of meeting their bad debts from a combination of profits, rights issues, asset sales and so on.

Anglo is a different matter. Clearly it owes billions that it cannot pay. The state is liable for its debts until sep 30. I would be very surprised if its liabilities are guaranteed beyond that date. Right up to sep 30 expect all kinds of declarations of support before the rug is pulled.

3. MK portrays the budgetary problems as smaller than the banking problems. To me this shows that he has misunderstood the situation. The recaps may well pay for themselves when the shareholdings in the banks are sold off. NAMA will probably cost about 20-25bn. But our deficit is running at 20bn a year and will do for the next 4 years. Obviously this is a far larger problem.

Reading this article reminds me of Brian Lucey's moronic idea to save Anglo by selling its deposit book. I am glad that Honohan is in charge and not either of these two clowns.

SkepticOne

dynamick wrote: »

Reading this article reminds me of Brian Lucey's moronic idea to save Anglo by selling its deposit book. I am glad that Honohan is in charge and not either of these two clowns.

Why is that moronic?

dynamick

Because you cannot sell a liability, you can only sell an asset. Money deposited in a bank is a liability, it is money that is owed by the bank to customers. Loans to customers are assets as they are owed to the bank. Brian Lucey seems to think that Customer deposits are kept in shoe boxes in the Anglo safe for a rainy day.

George Orwell 1982

dynamick wrote: »

The problem with this analysis is that the banks would have to fold for these losses to become state liabilities. AIB & BoI are not about to fold.

AIB and BOI don't have to fold for the State to take a hit. The state will have to step in and recapitalise if the banks have to write off 50bn.

dynamick wrote: »

It also ignore the multi billion euro write downs already announced by the banks in their annual statements to date and the fact that the banks are still massively operationally profitable and capable of meeting their bad debts from a combination of profits, rights issues, asset sales and so on.

Under a fairly reasonable set of assumptions MK is saying the banks could have to write off 50bn. How much would this be offset by profits, rights issues, asset sales etc? Does anyone know?

dynamick wrote: »

3. MK portrays the budgetary problems as smaller than the banking problems. To me this shows that he has misunderstood the situation. The recaps may well pay for themselves when the shareholdings in the banks are sold off. NAMA will probably cost about 20-25bn. But our deficit is running at 20bn a year and will do for the next 4 years. Obviously this is a far larger problem.

I read the article differently. I thought he was saying "yeah the deficit is really bad, but the govt. has taken some measures to get that under control and they are to be commended for it. But taking the banks problems and the deficit together means the situation is not managable." Debt will reach 140% of GNP which is the level which is now sinking Greece. Added to this is the fact that our economy is still contracting with 6,000 redundancies per month and insolvencies up 25% on this time last year. Rents are still falling, property prices have further to fall. Sooner or later the markets are going to call it for what it is and we will have to get a bailout from the EU.

BluePlanet

dynamick wrote: »

1
3. MK portrays the budgetary problems as smaller than the banking problems. To me this shows that he has misunderstood the situation. The recaps may well pay for themselves when the shareholdings in the banks are sold off. NAMA will probably cost about 20-25bn. But our deficit is running at 20bn a year and will do for the next 4 years. Obviously this is a far larger problem.

Reading this article reminds me of Brian Lucey's moronic idea to save Anglo by selling its deposit book. I am glad that Honohan is in charge and not either of these two clowns.

So, do you work for AIB or Bank of Ireland?
It's not only Morgan Kelly that is saying this, but recently the NYT had 2 economists saying the same.

"Simon Johnson, former chief economist at the International Monetary Fund, and Peter Boone of the London School of Economics say that "Ireland’s politicians, rather than facing up to their problems, are making things ever worse. Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly.”
They claim that "Ireland’s problems are, sadly, far deeper than the need for simple fiscal austerity. The Celtic Tiger’s impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bills.

"There is no simple escape, but if the government hopes to avoid a sovereign default, the one overriding priority should be to stop bailing out the banks. Instead, the government should wind down existing banks in a “bad bank,” while moving their deposit base and profitable businesses into new, well-capitalized banks that can function without a taxpayer burden. This will be messy, but it is far better than a sovereign default"
http://www.irishcentral.com/news/Ireland-worse-than-Greece-faces-financial-ruin-say-two-leading-economists--94688524.html

They also talk of leaving the euro.

SkepticOne

dynamick wrote: »

Because you cannot sell a liability, you can only sell an asset. Money deposited in a bank is a liability, it is money that is owed by the bank to customers. Loans to customers are assets as they are owed to the bank. Brian Lucey seems to think that Customer deposits are kept in shoe boxes in the Anglo safe for a rainy day.

I would not entirely agree with that. Yes, if I were to buy a deposit I would owe that money to the depositor, but while the depositor is happy to leave the money on deposit I can lend it out at possibly higher rates to others. A deposit book is something a bank will have spent money to accumulate, so potentially it may be willing to spend money to acquire depositors from another bank.

Of course that does not mean the particular deal Lucey is suggesting makes business sense, but the idea that because it is a liability in a bookkeeping sense does not, in itself, make it moronic, imo.

OMD

dynamick wrote: »

1. MK does not predict a run on the banks. He predicts that they will be nationalised. It is irresponsible for any publisher, including boards.ie to predict a run on a bank as it can become a self-fulfilling prophesy.

2. The substance of MK's article is that the Irish banks will probably face write-downs of 50bn and because the state has guaranteed the liabilities of the banks, that the state will have to pony up the 50bn, thus bankrupting the country.

The problem with this analysis is that the banks would have to fold for these losses to become state liabilities. AIB & BoI are not about to fold.

It also ignore the multi billion euro write downs already announced by the banks in their annual statements to date and the fact that the banks are still massively operationally profitable and capable of meeting their bad debts from a combination of profits, rights issues, asset sales and so on.

Anglo is a different matter. Clearly it owes billions that it cannot pay. The state is liable for its debts until sep 30. I would be very surprised if its liabilities are guaranteed beyond that date. Right up to sep 30 expect all kinds of declarations of support before the rug is pulled.

3. MK portrays the budgetary problems as smaller than the banking problems. To me this shows that he has misunderstood the situation. The recaps may well pay for themselves when the shareholdings in the banks are sold off. NAMA will probably cost about 20-25bn. But our deficit is running at 20bn a year and will do for the next 4 years. Obviously this is a far larger problem.

.

I have to agree with most of this. Kelly says banks will have liabilities as follows in 30 months time:
1. Property Development loans of 100 billion will loose €33 billion
2. Business loans of €35 billion will loose €7 billion
3. Mortgage loans of €140 billion will have a 10% default rate (ie close to 1 in 10 mortgage holders will default on their mortgage in next 30 months). The banks will only recover half the money owed and so have a loss of €7 billion

So total loss in next 30 months will be €49 billion which he reasonably rounds to €50 billion or pretty much the same as our current deficit over the same period.

He seems to say that all this 50 billion will have to be covered by the state but doesn't say why (and will not go into any discussions about it in public). As I have said before he seems to ignore any capital the banks may have or may raise through rights issues and sale of assets or through profits from other sectors.

George Orwell 1982

OMD wrote: »

He seems to say that all this 50 billion will have to be covered by the state but doesn't say why (and will not go into any discussions about it in public). As I have said before he seems to ignore any capital the banks may have or may raise through rights issues and sale of assets or through profits from other sectors.

It will have to be covered by the state because of the blanket gaurantee. The banks raised that money through selling bonds and when the bonds mature the banks have to pay the bondholders back their money. The state has gauranteed the bondholders their money, therefore when the banks can't pay the state will have to. That is how I understand it.

That is why he is saying when the gaurantee runs out the govt. should insist on a debt of equity swap.

OMD

George Orwell 1982 wrote: »

It will have to be covered by the state because of the blanket gaurantee. That is why he is saying when the gaurantee runs out the govt. should insist on a debt of equity swap.

But the banks are currently raising money. This is to help cover their liabilities. What do you think is going to happen that money?

George Orwell 1982

OMD wrote: »

But the banks are currently raising money. This is to help cover their liabilities. What do you think is going to happen that money?

Of course this will offset the losses but how much are they raising?

George Orwell 1982

Morgan Kelly's predictions could become true sooner rather than later as markets are getting very nervous about European bank debt: http://online.wsj.com/article/SB10001424052748704792104575264883867618368.html?mod=WSJ_business_whatsNews

"European banks are being forced to pay more for short-term dollar borrowings than banks in the U.S. and Asia—suggesting that lenders world-wide are increasingly nervous about the risks ahead for European banks as financial pain cascades across the continent."

George Orwell 1982

Very good post from Dr. Constantin Gurdgiev on true-economics blog

"As of now, both BofI and AIB are trading below 52-weeks lows. The financials are continuing to experience pressures. But a look back at the overall sector is warranted. Here are some stats:
Let's start from a far: dramatic or not, but the current market conditions are in line with the long term time trend in Irish financials. If anything, per almost 11 years of data, we are currently above the long run trend line. Guess there's more room for downward pressures, should long run dynamics matter.

Zooming in:
Note the chart above - this shows the totality of value destruction since the beginning of the credit crunch back in July/August 2007.

To see some more dynamics, consider the snapshot from the peak to today:
The chart above shows the entire extent of the crisis, with the medium term (through crisis) trend pointing to consistent positioning of the current market valuations. In other words, per trend, nothing dramatic is happening in the markets right now. I also posted some key dates that mark our policy and opinion makers' ability to track markets and predict the future.

Lastly, chart above shows the dynamics in Irish financials over the span of the 'rebirth of optimism' - the last 12 months during which various Government officials and politicians have made a score of statements to the effect that:

• Ireland has turned the corner on recession
• Irish banks are now in a stronger position than before
• Irish Government has made right decisions and these are now evident in the markets' approval, etc.

Revealing, isn't it?"

dynamick

George Orwell 1982 wrote:

I read the article differently. I thought he was saying "yeah the deficit is really bad, but the govt. has taken some measures to get that under control and they are to be commended for it.

He says that the budgetary problem is smaller...

MK wrote:

The Irish economy is like a patient bleeding from two gunshot wounds. The Government has moved competently to stanch the smaller, budgetary hole, while continuing to insist that the litres of blood pouring unchecked from the banking hole are “manageable”.

SkepticOne wrote: »

I would not entirely agree with that. Yes, if I were to buy a deposit I would owe that money to the depositor, but while the depositor is happy to leave the money on deposit I can lend it out at possibly higher rates to others.

The deposit book is just a list of people you owe money to. The money has already been lent out to customers or used to purchase securities such as bonds and gilts.

A deposit book is something a bank will have spent money to accumulate, so potentially it may be willing to spend money to acquire depositors from another bank.

A bank looking for new deposit customers would certainly pay for good depositing customers, maybe as much as 5% of deposits. So the distressed bank might transfer its deposit book to another bank by paying the receiving bank 95% of face value.

It's normal that the general public doesn't understand the very basics of how banking works or the difference between a bank asset and a liability but Brian Lucey is an associate professor of finance in Trinity College and earns more than 100K/year.

In this article he suggests that Anglo can be saved by selling its 28bn customer deposit book for 21bn. That's like an engineer suggesting that we build a bridge out of chocolate.

I never had Gurdgiev down as a chartist. You will notice that in chart 2 it looks like irish financial stocks are below their trendline price - if you believe in stock momentum and astrological investing. His graphs show that Irish bank shareholders have been hosed which is absolutely fair as they elected rubbish directors.

And Simon Johnson recommends a bad bank approach. Have we not just created a 45bn euro bad bank called NAMA?

Sand

I think the essential line of attack on the contributions of the likes of Whelan, Lucey, Kelly, and the rest of the Gang of 46 has been for someone (an estate agent, an auctioneer, a inhouse bank economist, a politician or civil servant) to pick at a minor point and make their rebuttal based on that. This is then used to discredit and dismiss the entire argument, having never actually dealt with it.

For example, Garrett Fitzgerald dragged Karl Whelan and the 46 away from the debate over just what a bad idea NAMA was, to arguing over whether the deficit was going to be closer to 20 or 30 billion for 2009 year end! It was a credit to the media savvy Fitzgerald - he freely admitted he didnt know anything about this NAMA lark, but he knew how to derail an academic economists attempt to inform public debate on a critical national issue. In the eyes of the media, the whole debate was reduced to what was at best a footnote, instead of looking at the basic point - NAMA was and is a horrible idea, and it will drag this country down.

How exactly Anglo and its stakeholders solves their own problems is not the primary issue ( it doesnt have depositors, it's broke). The primary issue is that they should be the ones soaking up the loss, not the taxpayer. Lucey here is pointing out the bleeding obvious - Anglo is a black hole, and we need to stop throwing good money after bad. But ignore that, and focus on some minor detail. It doesnt really hurt Lucey's argument if he misclassifed deposits as assets does it....it means Anglo is even worse off than Lucey thought.

dynamick

Sand wrote: »

...to pick at a minor point and make their rebuttal based on that...

When a commentator bases a deductive argument on a false assumption, all his conclusions are doubtful. It is logically possible for an argument to be valid even when the premises are false, but it will only be persuasive to a bigot.

Lucey's super plan for Anglo to escape catastrophe by selling its deposit book was not a minor flaw in his argument, it was his ingenious alternative strategy to the government's approach.

Kelly believes the banking crisis is larger than the deficit crisis and that the bad debts of the banks will all transfer to national debt. He thinks these two factors will bankrupt the country. Yet each premise is false.

These guys are self-publicists riding a wave of popular anger and a public desire to blame someone else and find an easy way out of our problems.

oflahero

dynamick wrote: »

When a commentator bases a deductive argument on a false assumption, all his conclusions are doubtful. It is logically possible for an argument to be valid even when the premises are false, but it will only be persuasive to a bigot.

Lucey's super plan for Anglo to escape catastrophe by selling its deposit book was not a minor flaw in his argument, it was his ingenious alternative strategy to the government's approach.

Kelly believes the banking crisis is larger than the deficit crisis and that the bad debts of the banks will all transfer to national debt. He thinks these two factors will bankrupt the country. Yet each premise is false.

These guys are self-publicists riding a wave of popular anger and a public desire to blame someone else and find an easy way out of our problems.

As Sand pointed out above, Lucey's alleged mistake only amplifies his argument, albeit unintentionally. You're picking on one point and ignoring the large mammal with the trunk sitting next to it.

As for 'these guys are self-publicists riding a wave of popular anger etc.', Kelly for one was shouting this stuff long before it became profitable or popular. In fact he's taken a hell of a lot of derision and scorn over the past few years. He would not be human if you were to detect just a modicum of 'I-told-you-so' in among the anger now.

dynamick

oflahero wrote: »

As Sand pointed out above, Lucey's alleged mistake only amplifies his argument, albeit unintentionally.

Lucey's argument (written on April 1) is that keeping Anglo going is not the cheapest approach. His alternative is to do something impossible - to sell a 28 billion euro liability for 21 billion euro thus making a 49 billion euro profit. This is not a little mistake or a nitpicking quibble - this is a monumentally stupid proposition. Lucey was given ample opportunity to retract but never did.

Kelly was right to call a bubble in 2006 but he wasn't the only one. 'The Economist' had headlined a global house price bubble and drawn particular attention to Ireland the year before
http://www.economist.com/business-finance/displaystory.cfm?story_id=4079027

Kelly chose an opinion (already promoted by the most mainstream economics magazine) over the opinions of the 'Ireland is different' monkeys at home. That doesn't make him a magic soothsayer with a licence to base his arguments on false premises.

Scofflaw

oflahero wrote: »

As Sand pointed out above, Lucey's alleged mistake only amplifies his argument, albeit unintentionally. You're picking on one point and ignoring the large mammal with the trunk sitting next to it.

As for 'these guys are self-publicists riding a wave of popular anger etc.', Kelly for one was shouting this stuff long before it became profitable or popular. In fact he's taken a hell of a lot of derision and scorn over the past few years. He would not be human if you were to detect just a modicum of 'I-told-you-so' in among the anger now.

The number of commentators pointing out that we were building our house on sand, so to speak, was actually very large - once past about 2003-2004, there were many commentators outside Ireland expressing such views. I know that's hard to believe, but it really is the case - everyone from the EU Commission to the OECD made the point. For example, an OECD report in 2006:

Ireland’s tax system is significantly more favourable to housing than in most other OECD countries. To avoid the chances of this scenario unfolding, the government should avoid any tax changes that make housing more attractive; indeed, the tax bias should be phased out over time. Aside from not fuelling the housing market, there are efficiency and equity reasons for reducing the tax advantages. A property tax could be introduced to help fund local infrastructure. This would also redistribute some of the windfall gains that accrue to people living close to new roads and public transport links and shift the cost for local services such as water and sewerage facilities so that businesses and households each pay their fair share. While this makes economic sense, in an Irish context where over 80% of the population own their own homes, it is currently seen as a non-starter. The second scenario is that house prices fall sharply, either because they are more overvalued than they appear or because a negative shock hits the economy. The impact on activity and the budget could be large.

So, while Morgan Kelly has a claim to be a credible economist, it's not really much more than that.

cordially,
Scofflaw

SkepticOne

dynamick wrote: »

The deposit book is just a list of people you owe money to. The money has already been lent out to customers or used to purchase securities such as bonds and gilts.

A bank looking for new deposit customers would certainly pay for good depositing customers, maybe as much as 5% of deposits. So the distressed bank might transfer its deposit book to another bank by paying the receiving bank 95% of face value.

It's normal that the general public doesn't understand the very basics of how banking works or the difference between a bank asset and a liability but Brian Lucey is an associate professor of finance in Trinity College and earns more than 100K/year.

It would certainly be very worrying if Brian Lucey meant you could sell liabilities for money however I don't think he means selling just the liabilities but rather the package of deposit liabilities plus associated funds. I think he may have overestimated the amount he would get but I think people here may be taking a somewhat simplistic view of his suggestion.

I found this speech by Thomas Huertas, director of the Banking section at the UK FSA on the issue of resolution in banking:

Under a deposit transfer, the authorities sell the bank’s deposit book to a third party. The deposit liabilities are matched either with good assets from the bank’s portfolio or with cash and the acquiring bank may pay a premium for the package of assets and liabilities. Under a bridge bank, certain assets and liabilities of the troubled bank are placed into a new institution that will continue, at least for the time being, whilst other assets and liabilities are left behind in a rump to be liquidated over time. Note that the authorities may elect to move directly to this solution without taking the bank through the intermediate stage of temporary public ownership.

I think some of us here may have been jumping to conclusions about what Lucey may have meant.

oflahero

So what if Lucey and Kelly weren't alone in spotting trouble ahead, that the international commentariat had spotted them too? That's no argument at all to denigrate their points. Up to 2007, the point is that those voices were completely drowned out in a sea of bubbletalk - we badly needed them and their ilk to continue to offer another point of view to the mainstream 'go-off-and-commit-suicide' brigade. That takes guts.

That they may be making errors in their analyses is a more sound argument to make. I can't get into the gritty details of Lucey's deposits-as-assets-or-liabilities point because I don't know enough about it. At the risk of sounding like a tabloid journo though, the broad premise that we as a nation are comprehensively more fooked than the present government will ever admit is convincing, and we need to be looking at far more radical measures to tackle the problems than the DoF's 'overpay for crap loans and pray for another economic miracle' approach.

ei.sdraob

oflahero wrote: »

the mainstream 'go-off-and-commit-suicide' brigade.

the go commit suicide brigade is alive and kicking still

see other threads in this forum where any "talking down the recoverah" is met with certain posts

Scarab80

SkepticOne wrote: »

It would certainly be very worrying if Brian Lucey meant you could sell liabilities for money however I don't think he means selling just the liabilities but rather the package of deposit liabilities plus associated funds. I think he may have overestimated the amount he would get but I think people here may be taking a somewhat simplistic view of his suggestion.

I found this speech by Thomas Huertas, director of the Banking section at the UK FSA on the issue of resolution in banking: I think some of us here may have been jumping to conclusions about what Lucey may have meant.

Not at all. Just read your own quote and compare it to what Brian Lucey was saying...

Under a deposit transfer, the authorities sell the bank’s deposit book to a third party. The deposit liabilities are matched either with good assets from the bank’s portfolio or with cash and the acquiring bank may pay a premium for the package of assets and liabilities....

So you sell a package of loans/cash and deposits to another bank, this would have the effect of reducing your requirement for capital reserves and giving you an upfront payment for part of expected future margins between your loan book/cash and your deposit liabilities.

Now look at what Brian Lucey was saying....

Sell the €28bn deposit book. This is a regular event in banking, and even if it has to take a discount of 25pc that would yield €21bn.

Let's give him all the benefit of the doubt, despite not mentioning matching assets let's assume that is what he meant. Despite saying that we would discount the deposit book let's assume he meant the loan book. Let's also ignore the fact that there are 23bn of central bank loans secured on the assets of the company which mean that you can't sell that loan book even if you wanted to.

So we are going to sell 28bn of loans and 28bn of deposits for 21bn, assuming that Anglo's loan quality is of perfect quality the loans would need to realise a margin of 75% over the deposit liabilities for the purchasing bank to break even, hmmmm.....

He also goes on about paying off 16bn interbank deposits with NAMA, where is he getting this figure from? Money will be going from NAMA to Anglo not the other way around.

I vote that we sell the national debt to Brian Lucey for a nice 50% discount.

dynamick

oflahero wrote: »

Up to 2007, the point is that those voices were completely drowned out in a sea of bubbletalk - we badly needed them and their ilk to continue to offer another point of view to the mainstream 'go-off-and-commit-suicide' brigade. That takes guts.

Yes well done Kelly and Lucey except, um, not so well done Lucey because in 2006 at the height of the boom:

Ireland’s housing boom is set to continue for at least the remainder of the decade, an Irish academic has predicted.
In a new study on the housing market, Dr Brian Lucey, a finance lecturer at Trinity College Dublin (TCD), said further strong growth in the Irish housing market was underpinned by four key factors: demand, demographics, culture and sociopolitical issues.

Lucey claimed that demand would continue to be supported by rising earnings, a low interest rate regime and limited supply.

http://archives.tcm.ie/businesspost/2006/02/12/story11769.asp

the broad premise that we as a nation are comprehensively more fooked than the present government will ever admit is convincing, and we need to be looking at far more radical measures to tackle the problems than the DoF's 'overpay for crap loans and pray for another economic miracle' approach.

This is not his broad premise, this is his conclusion based on two false premises.

And what are these radical measures you mention?

Is it a forced debt for equity swap for guaranteed bondholders? Because if it is then that requires a sovereign default.
Is it leaving the euro? Then we could print ourselves a few trillion Irish pesos and how do we then repay our national & foreign debts that are denominated in euros?

The govt strategy at the moment is:

• a planned multi-annual, multi-billion euro spending cuts programme
• a target to contain and repair the deficit in 4 years
• massive govt borrowing to stimulate the economy
• no more tax rises on personal or corporate income
• new taxes on consumption rather than earnings
• an enormous AMC/bad bank to keep the banking system alive
• huge writedowns by the banks to be paid for out of rights issues, shareholder equity, debt buybacks, operational profits
• huge losses for bank owners (shareholders)
• a recapitalisation programme that may well pay for itself
• a gradual exit from the blanket guarantee
• modest gdp growth in 2012-2014
• unemployment kept below 14%

If you don't like this approach you should propose something better.

SkepticOne

Scarab80 wrote: »

So we are going to sell 28bn of loans and 28bn of deposits for 21bn, assuming that Anglo's loan quality is of perfect quality the loans would need to realise a margin of 75% over the deposit liabilities for the purchasing bank to break even, hmmmm.....

I think you are correct that what Lucey expects to raise by selling the retail deposit book is very unrealistic though I wanted to dispute the idea that selling a deposit book is moronic in itself. It may well be what the government ends up doing if the bank is wound up.

SkepticOne

Some of these points I would dispute

dynamick wrote: »

The govt strategy at the moment is:

• massive govt borrowing to stimulate the economy

Isn't the massive government borrowing to cover the shortfall in revenue and to bail out the banks rather than to stimulate the economy?

• 
  huge losses for bank owners (shareholders)

If anything the government has acted to protect bank shareholders. The losses were much greater before NAMA was put into operation.

• modest gdp growth in 2012-2014
• unemployment kept below 14%

Both of these are hoped for (and disputed) outcomes. I don't think they can be classed as strategy.

oflahero

dynamick wrote: »

Yes well done Kelly and Lucey except, um, not so well done Lucey because in 2006 at the height of the boom:
http://archives.tcm.ie/businesspost/2006/02/12/story11769.asp

Right, should've emphasised more the likes of McWilliams & Kelly doing the Cassandra act for years, rather than the more recent volte-face of Lucey. Not that it mattered anyway, they weren't listened to.

And what are these radical measures you mention?

Is it a forced debt for equity swap for guaranteed bondholders? Because if it is then that requires a sovereign default.

End of? No. Even with all its attendant turmoil, a sovereign default looks like the fairest way out of this mess. We're in a huge hole largely not of the taxpayers' making. Your policy list below translates to 'we the taxpayers pay for it', a sovereign default translates to 'the creditors pay for it'. Yes, it's ugly, yes it means social upheaval, but I'd rather we take our medicine now rather than face a decade or more of stagnation, declining standards of living and ever crappier public services.

I don't believe it's going to happen though.

If you don't like this approach you should propose something better.

If I could propose something better I wouldn't be sitting on my swiss wasting time on Boards! I don't pretend to have any special economic/financial savvy. I do like to think I've gotten slightly better at noticing when I'm being shat on, though.

Scarab80

SkepticOne wrote: »

I think you are correct that what Lucey expects to raise by selling the retail deposit book is very unrealistic though I wanted to dispute the idea that selling a deposit book is moronic in itself. It may well be what the government ends up doing if the bank is wound up.

In itself it is moronic, the only value is in the loan book. If you want to raise cash you could sell your loan book, if you want to get rid of cash you would sell your deposit book. If you want to downsize you sell both, realising very little cash - most likely none or negative with the quality of Anglo's loan book.

It is clear from the figures he provided that Lucey did mean to sell the deposit book by itself.

SkepticOne

Scarab80 wrote: »

In itself it is moronic, the only value is in the loan book. If you want to raise cash you could sell your loan book, if you want to get rid of cash you would sell your deposit book. If you want to downsize you sell both, realising very little cash - most likely none or negative with the quality of Anglo's loan book.

It is clear from the figures he provided that Lucey did mean to sell the deposit book by itself.

So you are defining the deposit book as simply the liabilities associated with the deposits? The speech I quoted from would suggest that this is not the standard meaning (i.e. that the deposit book is the combination of deposit liabilities plus funds deposited).

It doesn't really matter though. I agree that Lucey is probably incorrect with his figures and that selling Anglo's deposit book would raise far less than he expects.

Scarab80

SkepticOne wrote: »

So you are defining the deposit book as simply the liabilities associated with the deposits? The speech I quoted from would suggest that this is not the standard meaning (i.e. that the deposit book is the combination of deposit liabilities plus funds deposited).

It doesn't really matter though. I agree that Lucey is probably incorrect with his figures and that selling Anglo's deposit book would raise far less than he expects.

The speech says that the deposit liabilities are matched with cash or loan assets. A deposit book still refers to the liability, the matched funds are not intrinsically related to these deposits but are withdrawn from the general assets of the bank.