Colm O'Doherty: According to Dan O'Brien there is no relationship between inequality and law breaking (Irish Times 24/08/12). This bogus statement is grounded in the same kind of statistical modelling which economists relied upon to predict ‘soft landings’ for economies with sound ‘fundamentals’ . The predictive capability of economics here is based on a positivism which seeks generalizations which are independent of culture. For Dan O’Brien and other neo-liberal commentators the hubris of positivism is manifested as a fetishism of numbers, an illusion of precision and the donning of the status shield of science. As we now know the so called pragmatism of economics as trumpeted by a large technocratic mainstream was nothing more than a policy driven skate on the thin ice of casino capitalism.
There is more than a whiff of this neo-liberal policy agenda in Dan O'Brien’s promotion of a mechanistic relationship between objective conditions and human behaviour. There is no natural science of society, and of crime in particular. The perspective on social order which is espoused in this article is well known to us all : it is the ‘orthodox’, the ‘conventional’ the ‘taken for granted ‘ world carried by mass media and the establishment. Namely that society is a fundamentally rational and consensual arrangement where deviance and crime is seen as a marginal and minority category. The deviants and criminals are seen as different from the ‘ normal’ population and there is generalised agreement on what constitutes criminal behaviour.
However, in reality, during the boom years, when inequality between the bankers, speculators and property developers and the rest of the population spiralled, particular types of criminal behaviour flourished. Consider anti-social behaviour. The concept of anti-social behaviour which has been disseminated by the media and the establishment in recent years is focused on a whole range of behaviours such as begging, neighbourhood disturbance/nuisance, public drunkenness etc. It is fair to say that poor and socially excluded populations are portrayed as the culprits here and that cracking down on anti-social behaviours is viewed as an exercise in the creation of social order in such neighbourhoods. If we examine anti-social behaviour using an interpretative rather than a mechanistic and positivistic orthodoxy lens we will see that the fallout from the anti-social behaviour of the bankers, speculators and developers has major repercussions for everybody. Our health services are in crisis, our education system is under stress and the vulnerable are abandoned. So the figures and statistics used to advance the arguments in the piece are concealing the reality that as inequality has increased in the US, the UK here and in other highly marketised economies so has the incidence of serious white collar crime. During the boom years poverty decreased but the crimes of the wealthy – as we are now discovering- increased. Crime statistics do not reflect this increase.
Apart from the conceptual limitations of his arguments Dan O’Brien also takes some liberties with the available statistics. There is a large body of evidence showing a clear relationship between greater inequality and higher homicide rates –see Heisch and Pugh’s (1993) review and Wilkinson and Pickett’s (2006) review.
Wednesday, 29 August 2012
Wednesday, 22 August 2012
The MOU, Big Box economics and shopping centres
Paul Sweeney: The Rule Book by which Ireland is presently run, “The Memorandum of Understanding” (MOU) between the Troika and the Government, is forcing the government to impose a high level of austerity and some welcome reforms, like the belated regulation of the rotten banking system; reform of the legal system which is run by lawyers for lawyers; and then some other “reforms”.
One such other “reform” in the MOU which has actually been implemented is to allow more Big Box supermarkets on the edges of towns, with vast car parks, hollowing out urban centres.
Right wing economic ideologues love Big Box economics. Some little ideologue slipped this “reform” into the MOU and now it is being enacted. They hope that it will bring down prices. It may for a while, till the competition has been eliminated and urban centres destroyed.
Too many economists are indifferent to the non-economic impacts of economic decisions. The destruction of urban centres and replacement by Big Boxes is outside “pure economics”, they will argue. They may however, concede that once competition has been wiped out, prices may rise again, but console us with their belief that the market will operate and it will eventually bring in other Big Boxes in competition with Big Box No 1.
Dundrum Shopping Centre, while less of a Big Ugly Box than many others, has sucked much of the heart out of Rathmines, Dun Laoire, Bray and other south Dublin urban town centres.
Supermarket sizes had been regulated by the state under retail planning laws in Ireland. They were “relaxed” to allow IKEA to drop its vast box into Finglas. IKEA threatened to hover up all the business from Northern Ireland and not to pay any VAT here. The government caved in.
Now more big boxes are to be allowed to be built all over Ireland thanks to the section on retail size inserted into the MOU.
In the light of the news that Ireland has the highest number of shopping centres per head of population in Europe, this will not happen too soon. This information on the flood of shopping centres is revealed in a survey of 24 countries by the commercial property consultancy, Jones Lang Lasalle. I do not think we needed a survey to find out that we had lots of empty shops, but nonetheless such empirical evidence is very useful to inform future decisions.
The survey found that Ireland had almost 500sqm of shopping centre space per 1,000 people - more than twice the average European of 179sqm per thousand. Most of our shopping centres had being constructed during the boom. Too many are located in regional locations which cannot now sustain all of their units.
It is therefore no surprise that even when the bust ends, Jones Lang Lasalle predicts that even a return to a healthy retail trade will not be enough to provide tenants for all of the retail space that has resulted since the boom.
State regulation has its faults, limits and errors are made, but the superiority of the market as the alternative has been found deeply wanting in Ireland, even before this relaxation of the retail planning laws. The inane property boom has cost us all muchos dineros, but will leave also a horrible physical blight on our cities and towns for decades to come.
Perhaps after we say goodbye to the Troika, if it happens, in 2014, the government will reassert itself as a government for the people and will reinstate the retail planning laws to protect our urban heritage from this clause in the MOU which enshrines suburban retail Big Box Blight all over Ireland.
One such other “reform” in the MOU which has actually been implemented is to allow more Big Box supermarkets on the edges of towns, with vast car parks, hollowing out urban centres.
Right wing economic ideologues love Big Box economics. Some little ideologue slipped this “reform” into the MOU and now it is being enacted. They hope that it will bring down prices. It may for a while, till the competition has been eliminated and urban centres destroyed.
Too many economists are indifferent to the non-economic impacts of economic decisions. The destruction of urban centres and replacement by Big Boxes is outside “pure economics”, they will argue. They may however, concede that once competition has been wiped out, prices may rise again, but console us with their belief that the market will operate and it will eventually bring in other Big Boxes in competition with Big Box No 1.
Dundrum Shopping Centre, while less of a Big Ugly Box than many others, has sucked much of the heart out of Rathmines, Dun Laoire, Bray and other south Dublin urban town centres.
Supermarket sizes had been regulated by the state under retail planning laws in Ireland. They were “relaxed” to allow IKEA to drop its vast box into Finglas. IKEA threatened to hover up all the business from Northern Ireland and not to pay any VAT here. The government caved in.
Now more big boxes are to be allowed to be built all over Ireland thanks to the section on retail size inserted into the MOU.
In the light of the news that Ireland has the highest number of shopping centres per head of population in Europe, this will not happen too soon. This information on the flood of shopping centres is revealed in a survey of 24 countries by the commercial property consultancy, Jones Lang Lasalle. I do not think we needed a survey to find out that we had lots of empty shops, but nonetheless such empirical evidence is very useful to inform future decisions.
The survey found that Ireland had almost 500sqm of shopping centre space per 1,000 people - more than twice the average European of 179sqm per thousand. Most of our shopping centres had being constructed during the boom. Too many are located in regional locations which cannot now sustain all of their units.
It is therefore no surprise that even when the bust ends, Jones Lang Lasalle predicts that even a return to a healthy retail trade will not be enough to provide tenants for all of the retail space that has resulted since the boom.
State regulation has its faults, limits and errors are made, but the superiority of the market as the alternative has been found deeply wanting in Ireland, even before this relaxation of the retail planning laws. The inane property boom has cost us all muchos dineros, but will leave also a horrible physical blight on our cities and towns for decades to come.
Perhaps after we say goodbye to the Troika, if it happens, in 2014, the government will reassert itself as a government for the people and will reinstate the retail planning laws to protect our urban heritage from this clause in the MOU which enshrines suburban retail Big Box Blight all over Ireland.
Tuesday, 14 August 2012
Invoking Luther
Tom Healy: Writing in today's Irish Times Steven Ozment claims that German Lutheranism explains and justifies the stance of the current German administration. 'According to polls', writes Steven Ozment, Germans 'hold tight to their belief, born of staunch Lutheran teachings, that human life cannot thrive in deadbeat towns and profligate lands'. I am not convinced and while not an expert in Lutheranism I am not convinced, either, that Brother Martin of Erfurt would see justification for what is sometimes inappropriately referred to as the 'German view' on Europe and the 'German approach' to European integration and co-responsibility.
Nat O'Connor has already posted about a statement by Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin. In truth there is no one German view or solution anymore than there is an Irish one. If the current European crisis has exposed deep inter-country tensions and rivalries it has also shown up the underlying social tensions within countries and across the entire continent. There are many incidents of 'profligate lands' and 'deadbeat towns' (One hopes that this is not a reference to NAMA land only!).
The diagnosis of the European political-economic crisis and the appropriates solutions depends to some extent on how one sees the problem. If you see it as the cartoon image of the irresponsible Irish or Greeks living off the hard-working Germans then the solution is one involving pain and redemption for the indolent and misbehaving. We all know where that mind-set and thinking in the 1840s led the official response to the famine in Ireland (the age of self-reliance, market freedom and work ethic etc).
If, alternatively, you see the problem as one of systemic failure in the private sector aided by systemic failure in public regulation and governance then the problem shifts from one of national or sectoral blame-shifting to one of how we overcome the neo-liberal world order. If you want to put it in biblical terms - the wages of neo-liberalism is death - death of social cohesion, death of social justice and in the end death of civilisation. Yes, individuals are responsible - but systems and structures are also part of the problem I suggest.
The problem and challenge is now to create a stronger European dynamic and solidarity while retaining the principle of subsidiarity so beloved by the early pioneers of the European project. We must avoid lazy stereotyping of national groups (the profligate peripherals versus the disciplined core etc) as well as enlisting the backing of this or that figure from the rich and diverse cultural tapestry of Europe. Scandinavian Lutheranism could arguably have some connection to the civic values and practices of our Nordic neighbours at least in terms of cultural history and economic conditions.
I will conclude with a quote from one of the greatest thinkers and heroes of the last century, Dietrich Bonhoeffer - a German and Lutheran who was martyred in 1945: '“We are not to simply bandage the wounds of victims beneath the wheels of injustice, we are to drive a spoke into the wheel itself.”
Nat O'Connor has already posted about a statement by Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin. In truth there is no one German view or solution anymore than there is an Irish one. If the current European crisis has exposed deep inter-country tensions and rivalries it has also shown up the underlying social tensions within countries and across the entire continent. There are many incidents of 'profligate lands' and 'deadbeat towns' (One hopes that this is not a reference to NAMA land only!).
The diagnosis of the European political-economic crisis and the appropriates solutions depends to some extent on how one sees the problem. If you see it as the cartoon image of the irresponsible Irish or Greeks living off the hard-working Germans then the solution is one involving pain and redemption for the indolent and misbehaving. We all know where that mind-set and thinking in the 1840s led the official response to the famine in Ireland (the age of self-reliance, market freedom and work ethic etc).
If, alternatively, you see the problem as one of systemic failure in the private sector aided by systemic failure in public regulation and governance then the problem shifts from one of national or sectoral blame-shifting to one of how we overcome the neo-liberal world order. If you want to put it in biblical terms - the wages of neo-liberalism is death - death of social cohesion, death of social justice and in the end death of civilisation. Yes, individuals are responsible - but systems and structures are also part of the problem I suggest.
The problem and challenge is now to create a stronger European dynamic and solidarity while retaining the principle of subsidiarity so beloved by the early pioneers of the European project. We must avoid lazy stereotyping of national groups (the profligate peripherals versus the disciplined core etc) as well as enlisting the backing of this or that figure from the rich and diverse cultural tapestry of Europe. Scandinavian Lutheranism could arguably have some connection to the civic values and practices of our Nordic neighbours at least in terms of cultural history and economic conditions.
I will conclude with a quote from one of the greatest thinkers and heroes of the last century, Dietrich Bonhoeffer - a German and Lutheran who was martyred in 1945: '“We are not to simply bandage the wounds of victims beneath the wheels of injustice, we are to drive a spoke into the wheel itself.”
Monday, 13 August 2012
Nat O'Connor: Three German economists and philosophers (Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin) have released a major statement to pursuade Germans (and Europeans) to consider the case for closer European political and economic integration. They call for a German constitutional convention to have an open public debate on the future of Europe and of Germany's place in it.
Given that Ireland is President of the EU next year and also having our own Constitutional Convention, it would be apt for us to have a similar national debate here on our vision for the EU and Ireland's place in Europe.
Thursday, 9 August 2012
Scale of inequality now a drag on our economy and well-being
Colm O'Doherty: The results from the Central Statistics Office Survey of Income and living Conditions 2010, released earlier this year, confirmed what most Irish people are acutely aware of – the gap between the top and bottom 20% of income earners is increasing. The well-off are getting richer compared to the rest of the population and are suffering little or no repercussions from the economic crash. Average income of the top 20% of earners was 5.5 greater than those in the lowest 20 per cent. This inequality ratio is up from 4.3 a year earlier.
Persistent and increasing inequality is a serious threat to both our economic prospects and our well-being. A new wave of research on the effects of inequality, growth and financial crisis all see inequality as a driver behind the unsustainable surge in household indebtedness which triggered the crash.
On the level of individuals, Joseph Stiglitz suggests that in the US people on lower incomes over-borrowed in order to maintain a rising standard of living in the face of stagnating real incomes. This borrowing, over time, became unsustainable and led to default and pressure on over-extended financial institutions such as Fanny Mae, precipitating the wider financial crash. A second set of theorists (Rajan, Fitoussi and Saraceno) argue that on the societal-level inequality is the driving force for policy choices which, in turn, lead to unsustainable household and governmental debt levels. In this scenario, neo-liberal economic policies use regulatory tools to facilitate low income households’ access to credit , particularly mortgages.
These policies encouraged low interest rates and financial deregulation to compensate for inadequate incomes. They also aided and abetted financial liberalisation and raising top incomes, seen as progressive policies by neo-liberals, through regressive taxation strategies. Policies such as these permeated the thinking of successive Fianna Fail coalition governments and, many people were convinced that that they represented a natural economic order. It appears that the current Government is also in thrall to these doctrines. While there is some overlap between these theoretical standpoints, they all clearly make valid links between inequality and the financial crash.
The consequences of inequality are also becoming clearer. Economic hardship, manifested as unemployment, wage reductions and income support cuts, is affecting all tiers of Irish society except those at the top who are becoming more and more adept at looking after themselves and their own. A recent report from the Irish League of Credit Unions found that 1.82 million adults, say they have less than 100 Euro a month spend after bills are paid. Poverty rates are on the rise with yearly increases in consistent poverty and at-risk–of-poverty rates being recorded by the CSO. Reductions in essential public services such as health and education, are weakening the social contract between citizens and the State.
The State is pursuing policies which openly discriminate in favour of the wealthy and against all other citizens. This policy direction is the road to economic and social ruin. While the left here appear not to have woken up to this reality – blaming the EU, the IMF and global capitalism for everything - world leaders in the US and France accept that government policy needs to be framed around re-distribution of wealth in order to balance the fiscal books and fulfil the social contract obligations of the State.
On the academic front, Robert Putnam, the author of Bowling Alone, who is recognised as an authoritative academic but not a firebrand, has pinpointed inequality, the closure of social mobility and diminishing social trust as threatening America’s economic future. The tax burden in Ireland, at 28% of GDP, is one of the lowest and most regressive in the EU. Sweden and Denmark and other Scandanavian countries have tax burdens of the order of 45.8 % and 48.2% respectively, and are not in the same economic disaster zone as us. Despite going against the economic orthodoxy we have been in thrall to for the past twenty years the Nordic region's tax policies have protected their social models, encouraging and realising more equal societies and avoiding the financial crash which is now inflicting terrible damage on the most vulnerable and weakest sections of our society.
The big question facing our Government now as it begins to frame its second budget is: will it continue to progress inequality and ramp up social and economic decline in the pursuit of measures which are widely discredited or will it put in place fair and equitable taxation measures which share the burden of economic and social renewal?
Persistent and increasing inequality is a serious threat to both our economic prospects and our well-being. A new wave of research on the effects of inequality, growth and financial crisis all see inequality as a driver behind the unsustainable surge in household indebtedness which triggered the crash.
On the level of individuals, Joseph Stiglitz suggests that in the US people on lower incomes over-borrowed in order to maintain a rising standard of living in the face of stagnating real incomes. This borrowing, over time, became unsustainable and led to default and pressure on over-extended financial institutions such as Fanny Mae, precipitating the wider financial crash. A second set of theorists (Rajan, Fitoussi and Saraceno) argue that on the societal-level inequality is the driving force for policy choices which, in turn, lead to unsustainable household and governmental debt levels. In this scenario, neo-liberal economic policies use regulatory tools to facilitate low income households’ access to credit , particularly mortgages.
These policies encouraged low interest rates and financial deregulation to compensate for inadequate incomes. They also aided and abetted financial liberalisation and raising top incomes, seen as progressive policies by neo-liberals, through regressive taxation strategies. Policies such as these permeated the thinking of successive Fianna Fail coalition governments and, many people were convinced that that they represented a natural economic order. It appears that the current Government is also in thrall to these doctrines. While there is some overlap between these theoretical standpoints, they all clearly make valid links between inequality and the financial crash.
The consequences of inequality are also becoming clearer. Economic hardship, manifested as unemployment, wage reductions and income support cuts, is affecting all tiers of Irish society except those at the top who are becoming more and more adept at looking after themselves and their own. A recent report from the Irish League of Credit Unions found that 1.82 million adults, say they have less than 100 Euro a month spend after bills are paid. Poverty rates are on the rise with yearly increases in consistent poverty and at-risk–of-poverty rates being recorded by the CSO. Reductions in essential public services such as health and education, are weakening the social contract between citizens and the State.
The State is pursuing policies which openly discriminate in favour of the wealthy and against all other citizens. This policy direction is the road to economic and social ruin. While the left here appear not to have woken up to this reality – blaming the EU, the IMF and global capitalism for everything - world leaders in the US and France accept that government policy needs to be framed around re-distribution of wealth in order to balance the fiscal books and fulfil the social contract obligations of the State.
On the academic front, Robert Putnam, the author of Bowling Alone, who is recognised as an authoritative academic but not a firebrand, has pinpointed inequality, the closure of social mobility and diminishing social trust as threatening America’s economic future. The tax burden in Ireland, at 28% of GDP, is one of the lowest and most regressive in the EU. Sweden and Denmark and other Scandanavian countries have tax burdens of the order of 45.8 % and 48.2% respectively, and are not in the same economic disaster zone as us. Despite going against the economic orthodoxy we have been in thrall to for the past twenty years the Nordic region's tax policies have protected their social models, encouraging and realising more equal societies and avoiding the financial crash which is now inflicting terrible damage on the most vulnerable and weakest sections of our society.
The big question facing our Government now as it begins to frame its second budget is: will it continue to progress inequality and ramp up social and economic decline in the pursuit of measures which are widely discredited or will it put in place fair and equitable taxation measures which share the burden of economic and social renewal?
Internal devaluation in the Eurozone
Tom McDonnell: Ronald Janssen explores the impact of falling wage costs in the Eurozone periphery here. He argues that export revival has not been enough to prevent the collapse in domestic demand that accompanies the cuts in public budgets and real wages and that the net outcome has been recessionary.
Tuesday, 7 August 2012
Guest post by Arthur Doohan: A perp walk for banks
Arthur Doohan: We all had a pleasantly salacious time some days ago watching various white-collar villains being hauled before the courts and given "good talking to's" by our esteemed judiciary. In the vernacular I believe this is referred to as the 'perp walk', where the fourth estate gets to harmlessly indulge our ancient tendencies to 'hue and cry' and 'witchhunt'.
All of which amounts to slamming the stable door on a horse whose cantering about the farmyard is still damaging this economy. Bad bankers and banking has caused huge current problems for everyone in the state. The same problems are afflicting most of the developed economies concurrently and concertedly.
Banking has seldom been an asset to the state or the economy in Ireland. It has had just as poor a history of labour disputes as other sectors and it has been sufficiently unfriendly to enterprise and innovation that the state has had to set up its own banks and to establish the global model for government agencies to stimulate investment, both foreign and domestic. And all this while the banks demanded the same privileges that obtained elsewhere such as depositor guarantees and light touch regulation.
So, if we are to avoid more of the same from our banks and to help us get out of this morass, I would ask you to consider a " 'purp' walk" for banking, that is, let us take out for a stroll the notion of the 'purpose' of banking. Specifically, what are banks for, what have they actually been doing, what are they doing now and what should they be doing in the future.
What we have
We, currently, have what are called 'universal banks', that is, they do 'everything' with respect to money and quite a few other things beside. Our banks borrow money, lend money, move money, convert money, 'invest' money and advise on all of the foregoing. For all of these services they charge fees as well as potentially profiting from 'exposures' or risk taking we inadvertently allow them to enter into with our money. About the only thing they don't do is print the damn stuff, despite what some 'theorists' will tell you.
This concentration of business models into a single conglomerate is a historic accident rather than a strategic decision. It is an accident waiting to happen which it does, repeatedly, as the history of banking shows. Further, it is an 'accident' that disregards the prudential structures that exist in all other financial markets.
Nowhere else are the risk takers allowed operate the risk transfer mechanism. In plain English, in every other financial market in the entire planet either there is an 'Exchange' which is an independent entity that carries no risk or risk transfer is done multilaterally from each to each other. Only in banking are the handful of big players, who carry the most risk, allowed to operate the 'clearing system'.
Out of this strategic oversight grows the risk that allows politicians to frighten us with threats of ATM shut downs and failures to pay wages and the like. The recent systemic problems at RBS/NatWest/Ulster have shown us that the 'clearing banks' are prone to failings in this.
There is, also, an embedded conflict of interest in the fact that banks are allowed to charge 'advice fees' for selling products that they will make profits on. Is there any legislation or regulation that forces bank officials to advise clients of their competitors products or services? If there is, I assume, it is 'enforced' to the usual standard of the Irish fiduciary authorities, says he pulling his lower eyelid to the floor….
A further issue is that its 'risk management tools' (derivatives principally) and risk transfer methodology (securitisation mainly) have proven to be ineffective and actually dangerous in many cases.
Added to all of this is a star system of employment leading overpayment for what amounts rewarding people for lucky gambling outcomes and encouraging doubling up of both good and bad bets.
Lastly, our banks insist on being given a Government guarantee for their 'raw material' (our deposits) so that they don't have to take responsibility for their profligacy. This exposes us to their 'moral hazard' and gives them a free embedded option, known, on Wall St., as the "trader's put" (the trader can 'put' you into trouble but walk away untouched himself). It has been amusing to watch them turn the notion of 'moral hazard' on its head in refusing to allow borrowers some relief from the bankers mistakes while they refuse to deal with their own moral bankruptcy; amusing in a very frustrating way, that is.
So, clearly, banking is a mess but our Government is in thrall to it even if the people no longer are. Clearly, also, it has been a mess for a very long time.
It is structurally unsound, overly complicated, morally deficient, professionally conflicted, technically overreaching and given to self-indulgent excess. In parenting terms, it's a spoilt child with a cocaine habit driving the family car.….with the family on board.
What we need
Anybody can lend money to anyone else and they can charge interest for it? So, why do we lend our money to bankers rather than directly to businesses or housebuyers? On the continent people do that, they buy bonds of (lend money to) businesses and housing associations they know. Yes, they have banks as well but 1) "not so much" and 2) "not so big".
In the 'Anglo-Saxon' world of business practice that we Irish have adopted by default (a word we must judiciously use), we do have a share buying culture but not a bond buying one. We use our banks as risk diversification mechanisms for our prudential investment strategy. That is, we let the bank manager invest our money in a pool of loans and we take a reduced return in exchange for a heretofore presumed safe one.
We need to preserve this function in banking and that is the only thing we need to keep.
Getting from here to there
Domestically, we have been witnesses to Lenihan's and Noonan's 'Frankenstein-ian' misadventures in attempting to create a viable banking system by assembling bits of dead institutions into facsimiles of living ones. Even the nomenclature of 'pillar banks' has been unfortunate in that instead of being strong and supportive they are seen as immobile, hard and old-fashioned.
Contrary to the assertions of those 'on the take' from the system, neither the Guarantee, the recapitalisations, NAMA or any other of the fudged reforms has created any institution capable of advancing new credit; as the closures, redundancies and shrinking debt levels attest.
Internationally, we have only seen the Vicker's Commission in the UK consider any changes to the structure and nature of banking. The concept of 'ringfencing' has a pleasant and well-meaning 'ring' to it but it has not been shown to be either 'organic' or concretely implementable. Further, the seven year implementation timetable seems unnecessarily long for such minor reforms and seems designed to allow for a sustained lobbying process to water down the provisions which has already got under way and already has the support of the Chancellor. Fortunately, the latest wave of scandals seems likely to consign Vickers to the dustbin of inadequacy and irrelevancy.
So, having dispensed with the current situation without reference to the classic Kerryman's 'directions' joke, we have to ask what road do we take to get to a stable safe banking system.
The prescription
There was nothing wrong with 'Glass-Steagall' apart from bankers not liking it which in itself seems a sufficient reason for bringing it back. The implied principle of having separate and single 'business lines' for operations with fiduciary duties would seem a sensible one and should be extended to the fullest degree. It would make real the concept of 'ringfencing'.
This would imply the creation of a utility clearing mechanism divested from the banks. If it was good enough for the gas and electricity networks here and abroad I don't see why it doesn't apply to the banks.
It would also imply the divestiture of the banks credit card businesses. Again, there is no reason why not to and there is no good reason why we should be tolerating financial 'conglomerates'. People already hold multiple cards from multiple operators, some of which are not bank affiliates and the banks already pool credit data into separate agencies to determine credit ratings. A further advantage to separating these 'business lines' is that the credit card system is in itself a form of clearing system and if completely independent of the banks would give a strength in depth through redundancy to the economy's need for payment clearing mechanisms.
Lastly, the banks should not be allowed to dispense advice for which they charge fees which puts them into conflicts of interest. This is the same objection in principle as saying that 'audit' and 'consultancy' should not be provided to businesses by the same firms.
For those who wish to cavil about the expense implied in these reforms, I can only point to the expense we are all being put to by not having these reforms and ask which you would rather go through again.
This leaves us with the problem of morally hazardous bankers. The operational difficulty is that we 'guarantee' the deposits but the problems come from the loans. How can one guarantee the loans? You can't in practice. What you can do in practice is constrain the guaranteed banks from lending offshore.
A particular problem with the Irish banking crisis was that German and British fundmanagers seeking higher yields lent money into Irish banks who lent it to their pet developers to overpay for German shopping malls and British hotels. It has not been explained why it is the moral duty of the Irish taxpayer to compensate these 'professionals' for their greedy mistakes. I understand why the Irish must pay for the hotels and shopping malls built in Ireland but I do not see why we are liable for those bought elsewhere.
I am not suggesting that banks should not be free to lend overseas…only that they should do it via distinct legal entities and that these should not be guaranteed by the State. If the bankers complain that the won't be able to do business overseas that is their problem not that of the State or its taxpayers.
In order to square the circle of competition and robustness and redundancy, I would want to see the 'mutual' sector restored to a position of health and strength. This could be done in many ways but perhaps the simplest would be to merge the EBS and PTSB and perhaps IL&P to give a fourth 'player' in the credit advance/banking sector.
As a final flourish to wrap up everything in a neat bow tie of robust redundancy, the PostBank should be reconstituted so as to provide a third clearing mechanism.
Conclusions
These reforms would leave us with a GDP appropriate banking industry robust to shocks with enhanced transparency and competition.
If the bankers say that they will be 'hamstrung', I say that they have 'hamstrung' the whole economy and that they should get used to suffering like the rest of us.
The Irish economy and the Irish people need working banks much more than it needs Irish owned banks and we need banks that won't get too big for our boots.
There is a quiet discussion being held right now in the Dept of Finance about the future shape of banking in Ireland. In that 'discussion' the civil servants are responding 'how high?' when the banks talk, in exactly the same way they did when the banks rewrote our bankruptcy legislation. We need to tell our politicians to get involved in that discussion and if they won't then we should get involved in it directly.
Recap
Those reforms in bullet form are;
- Create a utility clearing function to separate credit risk from payment transmission.
- Create single business line banks by divesting credit card businesses
- Forbid advice fees
- Remove the 'deposit guarantee' from funds lent overseas
- Reconstitute a fourth major lender from the old 'mutual' entities
- Reconstitute the PostBank
This is an edited version of a post which originally appeared on Arthur Doohan's blog
All of which amounts to slamming the stable door on a horse whose cantering about the farmyard is still damaging this economy. Bad bankers and banking has caused huge current problems for everyone in the state. The same problems are afflicting most of the developed economies concurrently and concertedly.
Banking has seldom been an asset to the state or the economy in Ireland. It has had just as poor a history of labour disputes as other sectors and it has been sufficiently unfriendly to enterprise and innovation that the state has had to set up its own banks and to establish the global model for government agencies to stimulate investment, both foreign and domestic. And all this while the banks demanded the same privileges that obtained elsewhere such as depositor guarantees and light touch regulation.
So, if we are to avoid more of the same from our banks and to help us get out of this morass, I would ask you to consider a " 'purp' walk" for banking, that is, let us take out for a stroll the notion of the 'purpose' of banking. Specifically, what are banks for, what have they actually been doing, what are they doing now and what should they be doing in the future.
What we have
We, currently, have what are called 'universal banks', that is, they do 'everything' with respect to money and quite a few other things beside. Our banks borrow money, lend money, move money, convert money, 'invest' money and advise on all of the foregoing. For all of these services they charge fees as well as potentially profiting from 'exposures' or risk taking we inadvertently allow them to enter into with our money. About the only thing they don't do is print the damn stuff, despite what some 'theorists' will tell you.
This concentration of business models into a single conglomerate is a historic accident rather than a strategic decision. It is an accident waiting to happen which it does, repeatedly, as the history of banking shows. Further, it is an 'accident' that disregards the prudential structures that exist in all other financial markets.
Nowhere else are the risk takers allowed operate the risk transfer mechanism. In plain English, in every other financial market in the entire planet either there is an 'Exchange' which is an independent entity that carries no risk or risk transfer is done multilaterally from each to each other. Only in banking are the handful of big players, who carry the most risk, allowed to operate the 'clearing system'.
Out of this strategic oversight grows the risk that allows politicians to frighten us with threats of ATM shut downs and failures to pay wages and the like. The recent systemic problems at RBS/NatWest/Ulster have shown us that the 'clearing banks' are prone to failings in this.
There is, also, an embedded conflict of interest in the fact that banks are allowed to charge 'advice fees' for selling products that they will make profits on. Is there any legislation or regulation that forces bank officials to advise clients of their competitors products or services? If there is, I assume, it is 'enforced' to the usual standard of the Irish fiduciary authorities, says he pulling his lower eyelid to the floor….
A further issue is that its 'risk management tools' (derivatives principally) and risk transfer methodology (securitisation mainly) have proven to be ineffective and actually dangerous in many cases.
Added to all of this is a star system of employment leading overpayment for what amounts rewarding people for lucky gambling outcomes and encouraging doubling up of both good and bad bets.
Lastly, our banks insist on being given a Government guarantee for their 'raw material' (our deposits) so that they don't have to take responsibility for their profligacy. This exposes us to their 'moral hazard' and gives them a free embedded option, known, on Wall St., as the "trader's put" (the trader can 'put' you into trouble but walk away untouched himself). It has been amusing to watch them turn the notion of 'moral hazard' on its head in refusing to allow borrowers some relief from the bankers mistakes while they refuse to deal with their own moral bankruptcy; amusing in a very frustrating way, that is.
So, clearly, banking is a mess but our Government is in thrall to it even if the people no longer are. Clearly, also, it has been a mess for a very long time.
It is structurally unsound, overly complicated, morally deficient, professionally conflicted, technically overreaching and given to self-indulgent excess. In parenting terms, it's a spoilt child with a cocaine habit driving the family car.….with the family on board.
What we need
Anybody can lend money to anyone else and they can charge interest for it? So, why do we lend our money to bankers rather than directly to businesses or housebuyers? On the continent people do that, they buy bonds of (lend money to) businesses and housing associations they know. Yes, they have banks as well but 1) "not so much" and 2) "not so big".
In the 'Anglo-Saxon' world of business practice that we Irish have adopted by default (a word we must judiciously use), we do have a share buying culture but not a bond buying one. We use our banks as risk diversification mechanisms for our prudential investment strategy. That is, we let the bank manager invest our money in a pool of loans and we take a reduced return in exchange for a heretofore presumed safe one.
We need to preserve this function in banking and that is the only thing we need to keep.
Getting from here to there
Domestically, we have been witnesses to Lenihan's and Noonan's 'Frankenstein-ian' misadventures in attempting to create a viable banking system by assembling bits of dead institutions into facsimiles of living ones. Even the nomenclature of 'pillar banks' has been unfortunate in that instead of being strong and supportive they are seen as immobile, hard and old-fashioned.
Contrary to the assertions of those 'on the take' from the system, neither the Guarantee, the recapitalisations, NAMA or any other of the fudged reforms has created any institution capable of advancing new credit; as the closures, redundancies and shrinking debt levels attest.
Internationally, we have only seen the Vicker's Commission in the UK consider any changes to the structure and nature of banking. The concept of 'ringfencing' has a pleasant and well-meaning 'ring' to it but it has not been shown to be either 'organic' or concretely implementable. Further, the seven year implementation timetable seems unnecessarily long for such minor reforms and seems designed to allow for a sustained lobbying process to water down the provisions which has already got under way and already has the support of the Chancellor. Fortunately, the latest wave of scandals seems likely to consign Vickers to the dustbin of inadequacy and irrelevancy.
So, having dispensed with the current situation without reference to the classic Kerryman's 'directions' joke, we have to ask what road do we take to get to a stable safe banking system.
The prescription
There was nothing wrong with 'Glass-Steagall' apart from bankers not liking it which in itself seems a sufficient reason for bringing it back. The implied principle of having separate and single 'business lines' for operations with fiduciary duties would seem a sensible one and should be extended to the fullest degree. It would make real the concept of 'ringfencing'.
This would imply the creation of a utility clearing mechanism divested from the banks. If it was good enough for the gas and electricity networks here and abroad I don't see why it doesn't apply to the banks.
It would also imply the divestiture of the banks credit card businesses. Again, there is no reason why not to and there is no good reason why we should be tolerating financial 'conglomerates'. People already hold multiple cards from multiple operators, some of which are not bank affiliates and the banks already pool credit data into separate agencies to determine credit ratings. A further advantage to separating these 'business lines' is that the credit card system is in itself a form of clearing system and if completely independent of the banks would give a strength in depth through redundancy to the economy's need for payment clearing mechanisms.
Lastly, the banks should not be allowed to dispense advice for which they charge fees which puts them into conflicts of interest. This is the same objection in principle as saying that 'audit' and 'consultancy' should not be provided to businesses by the same firms.
For those who wish to cavil about the expense implied in these reforms, I can only point to the expense we are all being put to by not having these reforms and ask which you would rather go through again.
This leaves us with the problem of morally hazardous bankers. The operational difficulty is that we 'guarantee' the deposits but the problems come from the loans. How can one guarantee the loans? You can't in practice. What you can do in practice is constrain the guaranteed banks from lending offshore.
A particular problem with the Irish banking crisis was that German and British fundmanagers seeking higher yields lent money into Irish banks who lent it to their pet developers to overpay for German shopping malls and British hotels. It has not been explained why it is the moral duty of the Irish taxpayer to compensate these 'professionals' for their greedy mistakes. I understand why the Irish must pay for the hotels and shopping malls built in Ireland but I do not see why we are liable for those bought elsewhere.
I am not suggesting that banks should not be free to lend overseas…only that they should do it via distinct legal entities and that these should not be guaranteed by the State. If the bankers complain that the won't be able to do business overseas that is their problem not that of the State or its taxpayers.
In order to square the circle of competition and robustness and redundancy, I would want to see the 'mutual' sector restored to a position of health and strength. This could be done in many ways but perhaps the simplest would be to merge the EBS and PTSB and perhaps IL&P to give a fourth 'player' in the credit advance/banking sector.
As a final flourish to wrap up everything in a neat bow tie of robust redundancy, the PostBank should be reconstituted so as to provide a third clearing mechanism.
Conclusions
These reforms would leave us with a GDP appropriate banking industry robust to shocks with enhanced transparency and competition.
If the bankers say that they will be 'hamstrung', I say that they have 'hamstrung' the whole economy and that they should get used to suffering like the rest of us.
The Irish economy and the Irish people need working banks much more than it needs Irish owned banks and we need banks that won't get too big for our boots.
There is a quiet discussion being held right now in the Dept of Finance about the future shape of banking in Ireland. In that 'discussion' the civil servants are responding 'how high?' when the banks talk, in exactly the same way they did when the banks rewrote our bankruptcy legislation. We need to tell our politicians to get involved in that discussion and if they won't then we should get involved in it directly.
Recap
Those reforms in bullet form are;
- Create a utility clearing function to separate credit risk from payment transmission.
- Create single business line banks by divesting credit card businesses
- Forbid advice fees
- Remove the 'deposit guarantee' from funds lent overseas
- Reconstitute a fourth major lender from the old 'mutual' entities
- Reconstitute the PostBank
This is an edited version of a post which originally appeared on Arthur Doohan's blog
Subscribe to:
Posts (Atom)