Wednesday, May 20, 2009

Economics 20/05/2009: Moscow, US Green Shoots

Is Alan Ahearne being paid to write Irish Times political infomercials? Today's Irish Times editorial from Alan Ahearne (here) is a marked departure from the long-standing tradition that the civil servants should stay on their main jobs (in Alan's case - that is, apparently to advise Minister Lenihan on matters of Economic policy - not Finance or PR) and not spend public money-financed time on addressing the media. Talking to the electorate is Minister Lenihan's job, as a politician and a member of the Government, not Alan Ahearne's.

That said, Alan's opinion fall flat on a number of other, more substantive points.

These bonds will add to the gross stock of public debt, but so long as the valuation of loans is roughly correct, there will be no change in net public debt. Nama’s assets and liabilities will roughly match," says Alan. Great. We couldn't have imagined this intricacy of accounting without Alan pointing it out to us. But hold on - Alan does not give a figure in his article as to what the expected returns to NAMA can be, or which assumptions he uses to compute such a return. Not a single number! 'Roughly match' may mean a shortfall of Euro 20bn or a gain of Euro20bn, or anything in between, or indeed anything above these numbers. Again, Alain is silent on the matter.

"This approach to fixing banks’ balance sheets has a proven track record. The asset management model has been supported and recommended by banking experts across the globe and used successfully in many countries in the past as part of the work-out process of problem loans. Done properly, investments in the banking system using this approach have eventually been recovered in full," says the article. Ok: which experts? where has NAMA-style model been successful in the past, under what conditions and to what extent? Crucially, how do successful past NAMA-style models compare in terms of underlying fundamentals to Ireland's case? Not a word from Alan on these issues.

Alan Ahearne goes into a lengthy challenge to the German plan for banks rescue. This is irrelevant to his article, as we are not asking our Government officials to provide us with the news stories analysis for Germany. His job and the job of his masters is to deal with NAMA, not with Germany. In this context, it appears that Alan simply uses an argument against the German plan as an argument in favour of NAMA. This, if so, would be fallacious, since Germans making a mistake with their plans does not validate NAMA fundamentals in any way.

In short, I am simply amazed by the political nature of Alan's article, its lack of clarity and rigor, its complete lack of respect for the taxpayers who expect official Government opinion to be grounded in factual evidence. This is hardly an article one can expect from an economist, but rather an article one can expect from a politician. Too bad the Irish Times editorial staff didn't ask Alan to re-write it before accepting for publication...

Moscow is still all sun and cool...
Yesterday was a good and productive day for the mission, meetings between companies and a great dinner in the National Hotel, overlooking the Red Square entrance and the Kremlin. There are some good news on companies front, which I hope to report in the Sunday Times article later, so no preview here. But I was impressed by one Irish company sealing a deal (long time under negotiations) in software area. I was also positively impressed by the Irish delegation head, Billy Kelleher, TD - his first official visit and he has been very good so far. As someone remarked couple of days ago (no names here) - he might be a much better choice of a delegation head. Mike Hogan of EI and the rest of EI team are doing great work on the ground - this is not new as I always known Mike and his team to be really first class point of contact to the Russian market.

Night out on town proved that Moscow is still very much abuzz with life, despite the slowdown. Couple relatively hip places (a Mexican dive with, strangely enough, a very loud rock band playing right in the entrance door, and a can-be-anywhere-else-in-the-world pricey beer joint) all had a calm, but busy, atmosphere. Confidence seems to be unshaken, as far as normal businesses go, but construction is dead and finance people are in hiding.

I was briefing a group of the Moscow Bar Association lawyers yesterday over a friendly coffee on some developments out there in the broader world. The main issue they wanted to know about was the whole mess of the EU/US financial services regulations. Not so much the banks, but the hedge funds etc. Hedgies are in the news in Russia because of the Chrysler story (when they refused an offer of $0.30 on the dollar of the company bonds and got hammered by the Communist-in-Chief in the White House of betting on a taxpayer bailout of the company. Well, there is a point to be made - has there been a single hedge fund in the US which received any bailout money? No. How many US automakers received such funds? All. Spot any difference? Of course, the automakers are all unionized and the unions are the cronies of the Democratic Party. Trace the line to Obama. Aside from politics, my view is that trying to regulate international (as opposed to domestic) financial markets is like squeezing water - should the US/EU try to put any severe measures in place, funds will move off-shore. We will see some measures passed and paraded as a dramatic departure from the status quo, but in the end they will be purely cosmetic. Much more under threat are domestic bankers, who have little choice when it comes to packing suitcases and moving to the Bahamas. In the end, costs will rise for all service providers - hedgies will see the rise much less than domestic bankers, implying that rates of return will fall, but the returns to international financial services will fall less (in the short run) than to domestic financial services. This situation will drive more competition into international finance and will lead to consumer-damaging decline in competition in the domestic sectors. Over a number of years, returns to international finance will fall and returns to domestic banking and finance will rise. As more and more banking clients move off-shore to follow lower cost international finance, EU and US economies will slow down in growth. So all regulatory risk talk is really a cost/return argument in my view. Let's see who is the most daft in regulation - the US Democrats or the EU - in a couple of years time...

US Green shoots just had a massive set back as the US housing starts fell a record low of 458,000 in April. Calculated Risk blog is predicting that we are going to see US house prices falling 40-50% relative to the peak by the end of 2010. Yeah, Davy guys, eat your shorts on US housing market improvements... And of course the inflation story is still out there (here), don't forget.


Ciaran Daly said...

Nouriel Roubini's latest article on RGE Monitor is pretty devestating for those green shoots enthusiasts.

TrueEconomics said...

Indeed, Roubini (aka Dr Doom) is in agreement on this one, and I must say, this makes me feel much more comfortable in trying to stand against the tide of optimism that has been moving the markets out of line with real fundamentals.