Did Financial Reporting worsen the crisis?

The political economy of media in the economy

Presentation by Marc Coleman to Dublin Economic Workship, October 2014

Newstalk presenter, Sunday Independent Columnist, bestselling authorFormerly: ECB economist

Irish Times Economics EditorDepartment of Finance Economist

A 4 Step approach:

Part I:

Political Economy and Political cycles

Part II:

Countercyclical comment

Part III:

Pro-cyclical comment

Part IV:

Who really got it right?

But first ……

…..a 3 part quiz……

Question 1Who in a 2003 radio interview with Eamonn Dunphy suggested that

Sean Fitzpatrick should be made Governor of the Central Bank of Ireland

and wrote on March 28th 2004:

Michael Fingleton’s Irish Nationwide published a cracking set of figures …I have alrady made a muggins of myself. I bought bank of Ireland stock a few months ago at just above these levels..But I could have done better. I should have bought into Nationwide

Far from denouncing this as stoking a property boom that was in full swing Julien Mercille’s book actually praises (?!?) this person (p 23) for exposing “the power of advertisers in influencing news content”

By the way the following year I terminated Bank of Ireland chief Economist Dan McLaughlin’s column in the Business Supplement of the Irish Times: I felt the property market was overheating and didn’t want mixed signals

Question 2Who wrote on September 28th 2008:

The only option is to guarantee 100 per cent of all depositors/creditors in the Irish banking system. This guarantee does not extend to shareholders who will have to live with the losses they have suffered. However it applies to everyone else”

He added in his book “Follow the money” that he persuaded Brian Lenihan to go for the guarantee scheme as follows:

“I argued because the Irish banks' funding had become so unstable, if we didn't guarantee the funding as well as the deposits, the banks would come crashing down…this was economic policy-making formulated in a kitchen and made up on the spot”

Julien Mercille’s book fails to mention this call, which some believe was instrumental in a bail out that cost us €31 billion

Question 3Who wrote in December 2005 that the housing market would grow

“at a modest but still significant pace”

and called for

“more scope for increased mortgage lending by financial institutions by means of subprime mortgages, 100 per cent mortgages and equity release loans”

This person was not, in fairness, responsible for either sub-prime mortgages and was well meaning in their comment. Still, Julien Mercille’s book should have balanced it’s praise for this economist (p 102) with the quote above

By the way in this year I stridently warned – in an interview with then Central Bank Governor - about the threat that equity release loans posed to the economy and called for data to be compiled on their extent

Political Economy and political cycles

3 numbers

But what do they mean?

Scaled proportionate to their size

31 billion

96 billion

324 billion

Now back to those numbers

31 billion IBRC debt taken into national debt in April 2013: Cost of Crisis

96 billion IFAC estimate of public sector pension liability

324 billion IFAC estimate of social welfare contingent liabilities due to cost of

universal welfare payments between a quarter and a third more generous than UK

So who were the real beneficiaries of the boom?

Julien Mercille:

• Bank bondholders

• Estate agents

• Media advertisers

Or

• Public sector pensions(including University pension liabilities bailed out to tune of €2 billion)

• Clientelist Welfare system

Why didn’t Unions/Academics stop the boom?

By 2006 housing activity accounted for:

- (at least) one fifth of all tax revenues

- Half of all revenue growth

- Majority of local gov’t financing via builders levies

…. So basically the answer to the question above is that …

THE HOUSING BOOMPAID FOR THE MOST GENEROUS SYSTEM OF PUBLIC PAY IN EURO ZONE

Why didn’t “the left” stop the boom

2007:

- Labour party’s main complaint was that gov’t wasn’t spending enough

- Lab/FG forecast 4% growth p.a. 2008-2012

As cited on page 150 in “Fall of the Celtic Tiger” I tried to warn about excessively optimistic forecasts:

April 17th Irish Times

“Brave assumptions on Growth may not add up”

Truth is….

Buchanan & Tullock:

If sufficiently organised 26% of voters can control election by- Logrolling- Trading votes….provided (Franzese- politicians are weak - electoral systems are very

sensitive- Parties are fractured

Tabellini:

• Public debt destined to increase

Buchanan & Wagner:

• Insiders exploit voter’s lack of knowledge about budget constraint

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2003 2004 2005 2006 2007election

The politics of Political economy

• 2004: Bad election result for FF. Good for SF

• Blind panic in FF

• Result: Inchidoney conference, Fr. Sean Healey

• Bertie Ahern converts to socialism

• And this is what happens next:

2004-2009In just 5 years …

..vested interests push up government spending

by 55%

A Neo-Liberal paradigm?

Ireland ?!?

The facts about Irish “Neo-liberal economic paradigm”

• CSO: Public pay 47% above private pay

• ESRI, ECB, EU Commission: Controlling for age & qualifications gap still highest in EU

• Nearly half GNP in state hands

• Current spending one quarter above 2004 levels

• Health spending 8.7% GNI well over EU average

• Unions consulted weekly, monthly

• Taxpayers consulted only every 5 years

• RTE state run, huge influence of left and hard left

• IFUT Gen Sec former Marxist who supported military dictatorship.

Health being a case in point:

• Highest medical pay in Euro zone

• Nearly double number of nurses per head compared to France

• 1 hospital per 92,000• In Britain and Netherlands 1 hospital per 200,000• Public sector power … not patient interest• €13 billion spend 4 times 1994 level…well above what

inflation and population growth would justify.

Health spending a case in point: Staggering rise between 2004-2014

2004 20140

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Health vote spending (€ billions)

% change between 2004 and 2014

Health vote +68%

Consumer Prices +18%

Population +16%

Ideology of statistics

• Why GNI and not GDP?– GDP counts low tax FDI activity

– Overstates ability to generate tax

– Fine for long-term debt servicing capacity (capital measurement)

– Wrong for short-term/current spending capacity measurment

• EU Commission May 2014

– EU average 7.1% GNI

– Ireland 8.7% GNI

% change98-08

Pub Sector(excluding health)

70.9Computing, ResearchDevelopment

55.0Business Services 58.4Consumer Price Index (Dec 2001=100)

44.8

2004-2009Current spending up 55%

2009-2014 Current spending down just 5.5%

2009-2014Tax burden on average family rises 30%

Taxpayer sacrificed to defend state spending

THE REAL POLITICAL ECONOMY STORY:

€31 bn = Cost of Banking crisis

€96 bn = Cost of public pension liability

€324 bn= cost of social welfare liability

NOW THOSE THREE NUMBERS:

Counter Cyclical policy & comment

Simple question:Your grandmother – whom you repeatedly warned to stop smoking – faces a crucial operation on her lung. She has a 50/50 chance of survivalOn visiting her the night before do you:

A. Remind her how many times you warned her not to smoke and warn her that she has a 50% chance of dying because she ignored your advice

B. Focus her attention on the 50% chance she will pull through

I WROTE THIS ARTICLE IN 6th

JULY 2006:

BRIAN COWEN

RESPONED ON JULY

13TH 2006:

Also in that vein..

Warnings of crisis (Marc Coleman) 2004

• October 2004 (DEW conference): Paper (published as Coleman (2005), ESRI QEC) warning that the Stability Pact had been eroded, leading to a deterioration in Europe’s financial stability

• October 2004 Magill:In an article I warned Bertie Ahern’s conversion to “socialism” foreshadowed a rampant rise in state spending (which subsequently rose 31% in 3 years)

• September 2005 As Irish Times Economics Editor Marc Coleman ceased taking regular articles from economists working for financial institutions.

• 2005 Sept (Irish Times) Marc Coleman carried ECB President Jean Claude

Trichet warnings on Irish economy overheating http://www.marccoleman.ie/wp-content/uploads/2014/10/Trichet.pdf • 2005 Nov 5th (Irish Times) Marc Coleman warned debt was turning the

Celtic Tiger to a Celtic Garfield http://www.marccoleman.ie/wp-content/uploads/2014/10/Overfed-Celtic-Tiger-becomes-cartoon-cat.pdf

• 2005 September I ceased practice of taking regular opinion columns from financial market economists as I felt this compromised Irish Times need to warn about a possible crash

Warnings of crisis (Marc Coleman) 2005

• March 31st 2006 (Irish Times) Marc Coleman warned financial regulation had collapsed in an article beginning “Stop the Economy I want to get off” and ending with the words “Nobody, absolutely nobody, is in control”. (see www.irish-times.ie archive 31/3/2006 for article)

• 2006 July 17th Marc Coleman confronted Brian Cowen in Galway Bay hotel (at a Fianna Fail economics conference) and challenged him to prepare for recession

• 2006 Sep 13 (Irish Times) Marc Coleman warned construction sector could crumble, taking down economy with it: “What if construction as our cornerstone crumbles…?”

http://www.marccoleman.ie/wp-content/uploads/2014/10/What-if-construction-as-our-cornerstone-crumbles_0951.pdf

Warnings of crisis (Marc Coleman) 2006

• 2007 Mar 25 (Irish Times) Marc Coleman warned that Ireland had becoming Europe’s most indebted economy

http://www.marccoleman.ie/wp-content/uploads/2014/10/Ireland-tops-debt-league.pdf • 2007 Apr 17 (Irish Times) Marc Coleman warned that political party

election forecasts and spending plans were too optimistic by far. Marc Coleman was praised for this in the recent book “The Fall of the Celtic Tiger” by Donal O’Donovan and Professor Antoin Murphy.

“Fianna Fáil’s economic policy is based on confident predictions but is it realistic?...”

http://www.marccoleman.ie/wp-content/uploads/2014/10/Brave-assumptions-on-growth-may-not-add-up-.pdf

Warnings of crisis (Marc Coleman) 2007

Question: Why are none of these referred to in Julien Mercille’s book?

Could it perhaps be because I have…..

- challenged the ‘progressive’ value system (high taxes and spending) which is book – and those who praise it – promotes?

- challenged Universities over their increasing politicisation and cost to the taxpayer?

- called for transparency re taxpayer bail out of €2 billion University pension fund?

If none of the above, then why?

Let’s look at what is in Mercille’s book

• Criticism of “The Best is Yet to Come”

• Selective quotes from Sunday Independent

• Lots of attacks on “Neoliberalism”

Read books before you cite them:The Best is Yet to Come about 2020 not 2010

It’s warnings re 2010-2016 period were clear

(p 41): “borrowers…are robbing their old age to pay for inflated house prices”

(p 41): “From already high rates, private sector credit rocketed…just when they needed to grow at a settled rate…house prices jumped up”

(p 42): “If they were 15 per cent overvalued in the autumn of 2005 they were around 25 per cent overvalued by 2007”

(p 42): “Some 140,000 stand to lose their jobs [in construction]”

(p 42): “By 2006 over half of [revenue] growth – essential to finance rapid increases in government spending – was dependant on either the property market or the construction industry”

There are many many more quotes in that vein concerning predictions for ensuing decade ie 2007-2016

So why did I write a book with that title?

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Average growth: 1997 to 2014Ireland: Euro area OECD

Source: OECD Economic Outlook, June 2013

Ireland is on a long term path of demographic recovery which this recession has interrupted but which now looks set to continue

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Source: CSO Population estimates, August 2014

Really disappointing:• J Mercille a lecturer in Geography, Environment & Planning.• Should have noticed mine was first book to:

• - Slam successive governments for failing to plan spatially (chapter 2 “Stunted nation” on “Leinsterisation of Ireland”)

• - Advocate a sensible urban strategy of properly densified cities to make more efficient use of land and avoid property price pressures

(chapter 3 “Density Dividend”)

• Called for higher skylines (within moderation i.e. Berlin not Boston) to make property in city centres more affordable for young people

(chapter 7 “The Only way is up”

• Called for implementation of Kenny report, for land price control and proper structures for local government planning

(Chapter 10 “The Legacy of Land”

Also in The Best is Yet to Come

Vision for recovery I

Predicted half a million population growth this decade

Already up 300,000 since book written (2007)

Vision for recovery II

Said in 2007 that an Asia strategy could lead Ireland to prosperity

2009-2013: Export demand grew by between 39% (Pakistan) and 94% (China) (UNCTAD)

2014-2019: Export demand to grow by 58.5% (IMF)

And as for “Neoliberalism”:Chapter 14 of first book slammed Ireland’s class ridden secondary education system as a bastion of privilege and unfair and unequal division in access to opportunity

Chapter 2 of “Back from the Brink” (2009) (chapter title was “Lax Americana” highlighted Republican John McCain’s role in the Arizona banking crisis of 1984 and subsequent unfitness for office

Chapter 11 called for a complete overhaul of financial regulation and a shift from Anglo Saxon to more continental style models of financial control

Chapter 12 praised Barack Obama’s as a new departure in US politics from GWB failed administration

But it also points out that:1. Democrats were prime movers in sub-prime crisis (which most Republicans opposed)2. Democrat controlled Senate with Obama support has since 2006 doubled US debt adding more

debt in 8 years than all Presidents since George Washington up to 2006

Julien Mercille thinks this is “not large enough to make up for lost demand in the economy” (p 180)

!?!?

Pro Cyclical policy & comment

Countercyclical comment needs to be …..well…..

Kinda countercyclical

i.e.

Countercylical in bad times as well as good times

“Bad news has travelled around the world before good news has

even put its boots

on”

Kepplinger, Hans Mathias (2000). The Declining Image of the German Political Elite. In: The Harvard International Journal of Press/Politics, 5(4) 71-80

Gorz, Marcel (2014) Good news and bad news; evidence of media bias in unemployment reporting. In: Public Choice, Springer Science and Business Media.

Dobelli, Rolf (2013) The Art of thinking clearly: Better thinking, Better Decisions, Sceptre

Johnston, Wendy & Davey, Graham The psychological impact of negative TV news bulletins: The catastrophizing of personal worries

Nyberg report (2010): Groupthink was key cause of crisis

Did

I

really

say

That?

Quotes and contextKey word is “Century”. Period of 100 yearsAlready by 2014

- Property Prices have risen 25%- Commercial prices up 31%

This is against backdrop of - mortgage drawdowns at lowest level

since 1972- negative credit growth- (well capitalised) banks not lending- activity so low ESRI/KBC suspended regular property price index for three years

Once stress tests completed- Prices will return, as I have consistently predicted to 2003-2005 range depending on: Rate of construction activity: Central Bank regulation of market

I STAND BY THIS PREDICTION

“Economy and house prices will rock & roll into next century”

Quotes and context

I criticised predictions of falls in property prices in March 2011

I criticised “excessively restrictive and counterproductive” regulation

I warned negative comment was forming a “self-fulfilling vicious circle”

I called for govt to “urgently establish and cogently communicate an integrated policy on housing, property, Nama and banking”

Key quote

“If banks are properly capitalised, if government fiscal policy starts curbing waste instead of raising taxes and if commentators do nothing to undermine confidence then a stabilisation of house prices at or close to 2004 levels can be sustainable

“Economy struggling in the grip of doomsayers” (March 2011)

“If banks are properly capitalised”• H1 results AIB, BoI Core Tier Capital one ratios 16% +• ECB stress tests to conclude this month giving all clear

“If fiscal policy starts curbing waste instead of raising taxes”• 2015 Budget begins process of reversing tax rises

“If commentators do nothing to undermine confidence”• Up/Down groupthink in boom/bust replaced by balanced comment

1 May 2012: Central Bank research proves me righthttp://www.centralbank.ie/publications/Documents/HP_Let5.pdf6 Oct 2014: Housing market proves me right http://www.independent.ie/business/personal-finance/property-mortgages/dublin-house-prices-rise-by-a-third-in-12-months-30640720.html

Morgan Kelly’s predictions of national collapseQEC ESRI (2007) “a likely scenario is for the selling price to fall by around 5% p.a. each year for the next decade”

Wrong: House prices fell sharply and dysfunctionally in 2008-2010Market disappeared in 2011-2012Prices are up 24% since trough for residential property (CSO, Myhome, Property Price Register) Prices are up 31% since trough

Morgan Kelly 2010, 2011 Irish Times

- GDP to collapse by 20 per cent

- Unemployment to reach 20 per cent

- Debt to top €250 billion

- Ireland to see emergence of “a hard right anti-Europe anti-Traveller party “

IRISH ECONOMY

Oscar Wilde

“Reports of my death are greatly exaggerated”

Whoops. No Apocalypse.

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National Non Dublin Dublin

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GDP 4.7 3.9 3.4

GNP 4.1 3.6 3.1

Deficit (% GDP) 3.7 2.7 1.8

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Back in Black (nearly)

Something is collapsing all right….

….but it is not Ireland’s future as so many economists forecasted

…so what is collapsing?

Philip Baty, ratings editor of Times Higher Education supplement

“UCD has plummeted out of the top 200 altogether”

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UCD rankings according to T.H.E.*

UCD rankings are collapsing….

David Beckham – v – Miroslav Klose

1 scores big contracts with advertisers & loses world cupsOther scores goals & wins world cups

There are commentators who advertise themselves well

Then there are those who want Ireland to succeed

Which type do you want?