Greece is NOT the reason why the Euro is failing. It is a symptom of the structural problems which have been there from the start.

The long quote below is from a speech Trichet made in Dublin in 2004. I came across it today in the National Library, filed with the annual reports of the Central Bank.

Trichet highlights the problems before dismissing them as unfounded. The solutions he put forward, of course, are the very ones which failed.

The quote ends with a belief in supply-side economics as the best provider of growth there is - the very argument being made today with regard to the ECB and its new-found ‘growth’ card: liberalize labour markets, cut taxes for business, and the market will sort out the rest.

To paraphrase the title of a Wedding Present Song, what did your last excuse die of?

let me stress that we Europeans have been very bold in creating a single currency in the absence of a political federation, a federal government and a federal budget at the euro area level.

Some observers were indeed arguing that without a federal budget of some significance the policy mix would be very erratic, depending on the random behaviour of the different national fiscal policies of the member countries. They were also arguing that without a federal budget it would be impossible to weather, with the help of the fiscal channel, asymmetric shocks hitting one particular member economy.

In this respect, the very existence of the Stability and Growth Pact actually allows to refute these two arguments: first, the Maastricht Treaty and the Pact provide a mutual surveillance by the “peers”- i.e the Ministers of Finance - of national fiscal policies; second, by calling upon Member States to maintain their budget close to balance or in surplus over the medium term, the Pact allows the automatic stabilisers to play in full in countries facing an economic downturn, without breaching the 3 % ceiling for the deficit. Beyond these economic underpinnings, other considerations are worth mentioning: a fiscal policy set according to rules adds to macroeconomic stability by providing agents with expectations of a predictable economic environment; this reduces uncertainty and promotes longer term decision making, notably investment decisions, and economic growth; in addition, sound fiscal policies contribute to lower risk premia on long term interest rates and thus support more favourable financing conditions; finally, fiscal discipline prevents spill-over effects from one country to another in the form of higher interest rates.

Some people argue that fiscal consolidation is detrimental to demand and economic activity. I would maintain that wealth and expectational effects of well-designed consolidation programmes might very much reduce and possibly even outweigh the traditional Keynesian multiplier effects of fiscal policy on demand and activity. If fiscal consolidation is perceived by the private sector as a credible sign that public spending will be permanently lower in future years, households will revise upwards their expected permanent income in anticipation of lower future taxes. Therefore, current and planned consumption will also increase.

In addition, fiscal consolidation might improve long-term financing conditions by way of less demand on the savings pool (reducing crowding out) and lower risk premia on government paper. Hence, wealth effects prompted by lower nominal and real interest rates would support larger consumption. Furthermore, following more favourable financing conditions, private investment is also likely to increase.

The case for expansionary effects on the supply side, via an improved competitiveness of the economy, is also important. If fiscal consolidation can induce moderating effects on wage demand, relative unit labour costs might decrease, with positive medium-term effects on real GDP growth through a greater competitiveness of the productive sector. Such effects are buoyed if lower expected tax rates and more efficient public expenditure enhance the working incentives and the investment environment.

[Central Bank and Financial Services Authority of Ireland. Central Bank Whitaker Lecture. Dublin, 2004. Filed in National Library of Ireland with Central Bank & financial Services Authority of Ireland Annual Report 2005. 1K 341 yr2005]

Many Irish people have seen the work of Ernest Kavanagh, but few know his name. He was the main cartoonist for The Irish Worker, Jim Larkin’s newspaper, and his satirical depictions of William Martin Murphy and the employers of Dublin during the 1913 lockout have illustrated many a documentary and textbook. Artist of the Revolution is a well-written and informative account of the life and work of Kavanagh. It brings together 35 of his cartoons, reproducing them alongside short essays which help to contextualize each one. Curry also reproduces a collection of contemporary illustrations by other artists ‘in order to provide a visual comparison and contrast to Ernest Kavanagh’s work.’

Born in Dublin in 1884, Kavanagh was listed in the 1901 census as an unemployed artist, and in 1912 he was working as an insurance clerk for the Irish Transport and General Workers’ Union (ITGWU). This was also the year he began producing cartoons for The Irish Worker, replacing the original cartoonist who was named Byrne. On 25 April 1916, Kavanagh was shot dead outside the front door of Liberty Hall, most likely by a British sniper.

Kavanagh published his work under his initials, “E.K.” and proved to be as popular as the Irish Worker itself. “Unlike the paper’s earlier artistic contributor’ writes Curry, ‘[Kavanagh] recognised quite clearly that more could be achieved by satirising villains instead of glorifying heroes, a realisation that gave his work greater vitality and power.’

Artist of the Revolution is a fitting tribute to one of the forgotten political artists of Irish working class. It is a testimony to Kavanagh’s work that it still manages to hit home in its depiction of the rank hypocrisy and verbal gymnastics of the Irish monied class. It also brings into sharp focus the sycophantic gush of Irish journalism today - a journalism too scared to mock the powerful, let alone investigate them.

[Artist of the Revolution is published by Mercier Press, RPP €12.99. See here for details.]

I was going through the annual reports of the Central Bank of Ireland there yesterday when I came across an article on fundamentals and non-fundamentals in the Irish housing market. The quote below spells out why the prices of assets, such as property, are not always set by supply and demand. Later on in the article the author says that although Ireland in 2003 showed all the signs of a property bubble, just because there was strong, detailed evidence of a housing bubble, that was not enough to prove that there was a housing bubble. Go figure on the logic behind that.

Anyway, here’s the quote outlining why, with assets, demand rises as price rises, and falls as price falls.

The market is self-correcting in the sense that excess demand (supply) will put incipient upward (downward) pressure on prices, but this will encourage additional supply (demand) which, in turn, will tend to stabilise prices. If the property market did in fact function in this smooth way, the type of inefficient pricing associated with overvaluation would be less likely to occur. When there are s peculative forces at play in the market, it does not operate in this smooth self-stabilising fashion, since price increases tend to increase, rather than decrease demand, and therefore, per se, would tend to geneate further price increases.

There are a number of reasons why the propety market does not operate efficiently and smoothly, First, since it takes time to build new units, supply is very inelastic in the short term. The supply of available land on which to build may, in some cases, present an even more severe constraint and can mean that supply can remain inelastic even in the medium-to-long term. Lags in supply mean that increases in demand have large effects on price. Speculators may be attracted into the market by these price increases in the expectation of further price increases. The additional demand coming from speculative influences can render these expectations self-fulfilling with prices becoming progressively more misaligned. By the time the construction industry is fully geared up to respond and new units begin to come on to the market, the initial demand may not prove to be as sustainable as initially appeared resulting in over-supply and sharply declining prices.

Secondly, the acquisition value of property tends to be a large multiple of disposable icome, or even of accumulated savings, since it is typically the biggest single purchase in the life cycle of households and is usually incurred at a relatively young age. It can, therefore, only be purchased on the basis of considerable financial leverage. But the loan market is generally understood to be subject to informational imperfections, inhibiting its smooth functioning and leading to rationing of some loan applications. This also restricts the flexible functioning of the property market and its ability to self-correct speedily following a shock to supply or demand.

A third factor which is related to the second, is the fact that property price increases provide collateal for further borrowing which may, in turn, add to demand in the market contributing to further price increases. This effect can also work potently in reverse with falling collateral values possibly leading to a credit crunch putter further downward pressure on prices. The use of propety values as collateral in the mortgage market can, therefore, exacerbate the volatility in house prices over longer horizons.

Other factors having a long-term impace on the housing market are financial market liberalisation, but more especially the impact of liberalisation on the banking industry, and fiscal policy. Financial market liberalisation can have the effect of releasing pent-up loan demand and facilitating a large influx of new participants into the property market over a short period of time. A credit boom could then instigate a property price boom. Fiscal policy is another factor that can also, and does, impact on the market, typically adding to demand. (p.55)

Central Bank & Financial Services Authority of Ireland , “The Irish Housing Market: Fundamental and Non-fundamental Influences.”Financial Stability Report 2004. Dublin, 2004. 51-76. NLI Reference: 1K 582, yr 2004.

There are two treaties being discussed at the moment and as an exercise in the nature of power in the EU it’s worthwhile comparing the hand-wringing over Basel III with the Blitzkrieg approach of the Austerity Treaty advocates. One, of course, involves the interests of banks, the other the interests of citizens. No prizes for guessing who’s winning that battle…

http://www.businessweek.com/ap/2012-04/D9UFBQM80.htm

For more on Basel III, click here - http://www.bis.org/bcbs/basel3.htm

One of the core proposals of Basel III is the shoring-up of the capital base of banks ‘just in case’ there’s another banking crisis.

Last month the Financial Times ran a story on the move by major European banks to offer investors the chance to sell or swap €100 billion of notes:

In the past six months, lenders including BNP Paribas, Commerzbank, Royal Bank of Scotland and Unicredit have offered holders of a range of debt instruments (from covered bonds to so-called hybrid debt*) the chance to sell or swap those notes at a premium to market prices.

The activity is part of a reorganisation of banks’ balance sheets that enables them to convert debt into higher-quality core tier one capital, rather than embark on a round of dilutive capital raisings…

One recent exercise by Credit Suisse focused on retiring old debt and replacing it with new debt instruments well in advance of the 2019 deadline for lenders to comply with Basel III banking regulations.” (”Europe’s banks launch debt offers to boost capital,” Financial Times, 11 April 2012, p.33)

Repackaging old debt and calling it clean. This is the way that Europe’s banks are meeting their obligations to provide a secure capital base for future credit flow problems. And they don’t even have to get this finished and fully in place until 2019 - which is grand of course, as long as the next six years are the quietest, most secure and most financially stable years Europe has ever known…

*Hybrid debt was once described by Satyajit Das as ‘a new old way to lose money’ - see here.

Central Bank of Ireland, Annual Report for the year ended 31 December 1988 (incorporating the Quarterly Bulletin for Spring 1989). Dublin, 1989. Table C6, pp.36-7
Central Bank of Ireland, Annual Report for the year ended 31 December 1993 (incorporating the Quarterly Bulletin for Spring 1994). Dublin, 1994. Table C8, pp.52-3

09.30 - 16.30h Friday 25 May 2012
The Banking Hall, Foster Place, Dublin 2
Open Access Symposium
Admission free

The Dublin City Research Group is pleased to announce a one-day symposium ‘Making Money in Dublin since 1500′. This exciting topic opens a window on far more than the city’s economic and financial history, it appeals to academics in a variety of disciplines and to the general public.

For centuries Dublin has been the dominant location for making money in Ireland. Locals and new arrivals worked in an array of trades, businesses and professions - earning and spending, investing and losing money. As a capital city, Dublin was also home to lawyers, engineers and administrators attracted by the chance of a government job. Dubliners have lived and worked outside these approved (and taxed) workplaces too. Crime pays, and the pickpocket, fraudster and corrupt official are bound up with urban life. The world of work also involves social and political networks, fraternal organisations and strategic marriages.

(more…)

I’ve set myself the task of finishing this book sometime around Summer 2013, so there’s still a good way to go. The framework of the book, though, is constituting itself around seven main areas:

1. Monetary policy and the Irish pound (1922-1999)

2. Private banks and indigenous investment (1922-2012)

3. Financial intermediaries and the Irish State (1922-2012)

4. The IFSC and the tax haven industry (1987-2012)

5. The Euro (1992-2012)

6. Ireland and the shadow banking system (1991-2012)

7. The reproduction of private financial power via the structures of the state (1922-2012)

I’m not sure of the make-up of the chapters just yet - more than likely they’ll follow the topics closely enough - but the approach will be the same as the last book: that is, history as a canvas which allows us to observe deep social forces in motion, in this case those that surround the dynamics of money and finance and the Irish State.

There are other topics which need to be covered - the nature of money and the money circuit ; the role of central banks in a national economy ; currency, credit-money and the rise of financial debt products ; - but I’m hoping to explore these as they arise.

The final topic listed is really the central theme of the book - the way that finance uses the State to reproduce itself. This is not just in terms of bailouts in times of crisis, but in the shaping of national economic policy to suit its needs. And because its power is structural, the scale and dimensions of it are not down to any one person or group of individuals - nor can they be observed simply from the perspective of personal experience. The sense of inevitability about the way things are done comes from the fact that there is a machine at work here, a social force that is somewhat impersonal, even though it is produced by interactions between people.

The image which pops into my head when trying to explain this to myself is that of Hannibal Chew in Blade Runner, explaining to Roy Batty that he just does eyes - that in the great scheme of things his role in the production of androids is small and insignificant:

A deeper and more horrifying example is that of Walter Stier, an employee of the Reichsbahn, the German railroad, during the Second World War. Stier was responsible for scheduling normal passenger trains, as well as the trains which brought people to the concentration and death camps.

Stier was interviewed for the documentary, Shoah, where he gave the following account of his role in the Holocaust:

Did you know that Treblinka meant extermination?

Of course not!

You didn’t know that?

Good God, no! How could we know? I never went to Treblinka. I stayed in Krakow, in Warsaw, glued to my desk.

You were a . . .

I was strictly a bureaucrat!

In his 2011 publication, Debt: The First 5,000 Years, David Graeber tells the following story:

For almost two years, I had lived in the highlands of Madagascar. Shortly before I arrived, there had been an outbreak of Malaria. It was a particularly virulent outbreak because malaria had been wiped out in Madagascar many years before, so that, after a couple of generations, most people had lost their immunity. The problem was, it took money to maintain the mosquito eradication program, since there had to be periodic tests to make sure mosquitoes weren’t starting to breed again and spraying campaigns if it was discovered that they were. Not a lot of money. But owing to IMF-imposed austerity programs, the government had to cut the monitoring program. Ten thousand people died.”

You do not have to be a monster to play a part in monstrous acts. The officials from the IMF who oversaw the cuts that led to the deaths of ten thousand people I’m sure were good parents, and courteous to their neighbours. And Walter Stier spent the war in an office in Warsaw, drawing up timetables for trains. From their own perspective, each was just doing a job - one that was intimately linked yet strangely detached from the end result. I just do trains, I just do eyes, I just do the accounts - when the system at play is observed in motion, though, the innocuous acts which facilitate its direction begin to lose their lightness.