Sunday, October 18, 2009

Economics 18/10/2009: Soros-Nama, R&D spending, Pat McArdle v Morgan Kelly

Update 1:
Karl Whelan is very good on McArdleism - read here.
As does Stephen Kinsella (first hand account) - here.

Update 2: What Apple's latest numbers tell us about R&D investment

Apparently, our Montrose journos have no respect for both - the basic right of freedom of speech and expression and the basic premise that true patriotism is about telling the truth, not about donning 'green jerseys'... This is why I stopped watching majority of RTE programmes long ago - at least BBC (for all its biases) has balls to support freedoms of speech and expression.

Couple of housekeeping items... one on Nama and another one on Knowledge Economy, plus Pat McArdle on Morgan Kelly and more...

Reading through September 2009 interview George Soros gave to Bloomberg Markets magazine, I can across the following quote from the legendary speculator:
Q: "Is this economic contraction something new or something we've seen before?"
GS: "No, you haven't seen it before. Historically, you have the 1930's, the Depression, but since then, whenever you had a financial crisis, the authorities always took care of it and stimulated the economy, extended credit and got it going again. And that just made the bubble grow bigger. (Emphasis is mine) This time it is the end of an era and this is different from any of the financial crises that you have experienced in your lifetime."

The interviewer did not pursue any of the points made by Soros above in any detail. He moved on to the next question. This is a sad opportunity missed because what Soros was saying here (or hinting at) is of potentially great significance. If the current crisis is an end of an era of credit-fulled bubble then:
  • Restarting a new credit cycle is not a solution to the systemic problem, but another attempt to temporarily re-inflate the bubble. In terms of Nama, why are we assuming that the Irish economy needs another credit expansion, especially the one that is (hoped) to be restarted on the back of purely domestic credit injection? Ireland is a tiny drop in the ocean of global finance and an idea that we can, at the expense of our own taxpayers, relaunch a credit mechanism in this country's banking sector is patently absurd. It is equivalent to pouring a cup of water into a desert of quick sands in hope that life will return...
  • Even more fundamentally, if this is an end of an era of credit expansion-driven growth, then what will be the new paradigms for future growth? A topic worth exploring before we commit to a futile effort of reigniting lending in one of the world's most indebted economy.
  • Lastly, if credit-financed growth is the thing of the past, then will new growth path be steep enough to achieve returns on peak-of-valuations loans Nama is taking in? Most likely, the answer will be no.
The next question asked of Soros is even more significant:
Q: "Are we trying to have a pain-free crisis? Is a consolidation needed?"
GS: "I'm afraid that is the case. We should have taken the pain and recapitalized the banks. Instead of that, we kept them alive and gave them hope that they can rebuild their balance sheets, and that is going to drag and weigh on the economy for a long time to come. We suffer from an inability to face an unpleasant reality. We expect our politicians to effectively deceive us, to tell us things are better than they are. That is our weakness."

A brilliant statement, reflective much more of the Irish realities than of those of the US.
  • Nama is par excellence a 'repairing of balancesheets' exercise, not a recapitalization one (hence the Government is now committed to post-Nama recapitalization). My article in the current issue of Business & Finance magazine clearly shows that a recapitalization via direct purchase of equity is more cost efficient than Nama. It will also address the problem of capital adequacy, while leaving the banks to manage the loans. Soros is talking about this type of a solution. And yet, official Ireland remains indifferent to any proposals other than Nama.
  • We really do, culturally, ethically and economic policy-wise look into Government's mouth in hope of hearing them utter something re-affirming, something positive. We take distorted estimates for hope, half-truths for optimism and huge tax bills for 'necessary corrections'. If Nama will drag this economy down for many years to come, our innate desire to rely on the state for 'tough solutions' while we avoid the truth is going to hold us in this crisis for decades.
Oh, and there is an interesting note from Crimson Observer blog (here) - it looks like some old bubble-time hawks are jostling to position themselves as the buyers of distressed properties in Ireland as Nama bites into the market... Interesting. But taking this further - will Nama trigger re-transfer of defaulted properties back to the, pretty much the same, hands of old developers at a knock-down price? Possibly...

Short note from the land of high R&D spending (sorry 'investment'):

"The 908 million euro ($1.3 billion) goodwill write-down on Nokia Siemens Networks, ...certainly contributed to the unexpected 559 million euro ($833.9 million) loss reported by Nokia in the third quarter. However, Nokia had forewarned that it would be writing down the value of the business after successive quarterly losses. A more worrisome and unexpected trend, however, is the lackluster demand for Nokia's smart phones, essentially phones that double as mini computers such as the N97 and the E60. The company's share of that market globally fell to 35% in the quarter ending in September, from 41%."

So (quote above is from Forbes magazine) Nokia (aka Finnish economy) is suffering from:
  • Lagging position in smart phones (despite Finland having higher civilian R&D spending as a share of GDP than it's closest rival in smart phones market - the US);
  • Lagging strategy to the market - Nokia unveiled details of its forthcoming N900 phone in the middle of the third quarter, well after new launches by Google and Apple;
  • heavy competition in China and India from low-cost producers (despite Nokia's vast outsourcing and off-shore production network, partially financed by Finnish taxpayers).
Run through the above 3 points and you can see that R&D spending on labs and technicians has nothing to do with Nokia's woes. Simple business management, marketing, strategy and business processes flexibility are behind it losing ground to its rivals.

In contrast to Nokia, Apple just posted (Monday) a 46% increase in its fiscal Q4 earnings and higher revenue than a year ago led by better-than-expected sales of iPhones, Mac computers and iPods (here). You can read about Apple strategy in terms of introducing new products at higher frequency than its rivals and launching upgraded software to coincide with new products offerings in the above-linked article. But what actually put Apple back into the global competitiveness game was not just product innovation - it was i-Tunes concept for selling music and then Apple Store concept for selling hardware, followed by, yes - i-Phone APS online 'store'. It is retailing that reinforced product innovation for them - something that Nokia with its government-supported R&D spending programmes can't replicate to date.

Still want to chase Finns in putting more R&D spending onto the Exchequer books?..

The news that Pat McArdle (reported here) had a total meltdown in his challenge of Prof Morgan Kelly did surprise me. I have deep respect for Pat's work back in the Ulster Bank - he was one of the most knowledgeable bank economists of recent times and I always valued his research notes for an inimitable ability to link intuition and data. Ditto for Prof Kelly.

Hence, I was shocked to learn that Pat McArdle questioned Morgan's right to express his views. I certainly hope that Pat will publicly apologise to Morgan for this outburst. And I certainly hope that Kenmare organizers would have guts to openly defend Morgan's liberty to say what he wants on the subject of economics and economic policy when he wants to say it.

One would expect censorship to be despised and rejected in academic setting and amongst social scientists. Alas, I know first hand that this is where it is practised. For example, a birdie chirped to me recently that one department of economics in Ireland has recently explicitly banned its junior members (senior faculty of course said 'Non' to the ban) from speaking to the press or expressing their opinions in public on the matters of economic policy unless they obtain a prior consent of the Department Head. How's that for 'democratic' and 'socially active or relevant' academia? Standard job descriptions for academic posts in this country state that one of the parts of our work involves service to a broader community outside the halls of academic institution.

This is precisely why I hope my colleagues who attended Kenmare and were first hand witnesses to Pat's attack on Morgan (alongside Kenmare organizers) issue a clear statement as to the value of the freedom of speech and expression and the value of freedom of thought.

For now, I am saddened by the fact that an economist for whom I have nothing but respect had joined a pack pursuit of independent thought...


Greg said...

I thought Pat McArdel was utterly unconvincing on RTE today. Trying to backtrack

To paraphrase.

“Oh it was just a heated exchange between respected economists”

When asked what he objected to in Morgan Kelly’s remarks he answered….

Again paraphrasing

“Well I don’t think NAMA is perfect but what’s the alternative…..”

I thought it was pathetic.

Your comments about censorship in economics departments are truly worrying.

Voluntary group
think is one thing. Enforced groupthink is a different matter altogether.

Paul MacDonnell said...

@Greg. Group-think always has an element of coercian - at least - once we get past the euphoric phase. Ireland hasn't fallen into group-think since the crisis hit. Its group-think engine - aka Social Partnership - has simply been defending itself.

@Constantin on a similar vein wrt to Gov't policy attempts to reinflate bubbles it is interesting to ponder whether the government sector itself - having been the main beneficiary of the Celtic tiger (in pure wealth transfer / accumulation terms) can be seen as the primary self-interested agent behind NAMA and the US / UK stimulous packages.

You put it brilliantly when you talk about tax increases being taken for corrective measures etc..

Geckko said...

You are most gracious in your assessment of Pat McArdle.

Can't say I agree though. But one example where his theoretical grounding an "intuition" seemed to fail catastrohpically:

"Outsiders looking at the Irish market frequently look no further than the loan to income multiple and recoil in horror when they learn that it is now five or more. However, this fails to take into account the more sophisticated affordability measures now employed by Irish lenders."
Pat McArdle 6 November 2006

Paul MacDonnell said...

This comment was posted on and I also post it here.

When someone challenges freedom of speech in the way that P McA has done it is not ‘doing his job’ for O’Rourke of RTE to simply kick the ball on by asking ‘isn’t that a valid argument - or whatever’. The correct, much more interesting, and more professional response is ‘what is it about the anti-NAMA argument that makes you so uncomfortable and would cause you to say such things.’.

The virtues of ‘unanimity’ we got with social partnership and ‘consensus’ politics are exactly the same as the virtues of unanimity we are getting with this ‘Green jersey’ argument. The whole social partnership system was a subversion of democracy. Let’s face it, it was nothing more than a clearing house for vested interests. Opposition and proper scrutiny was, quite literally, designed out of the system. All we’re getting now is the reaction from the gutless monster as it finds that its Group Think has got the elites into trouble.

After the debacle of the 1980s we never had a moment of Truth in Ireland. I have always said that social partnership was a rescue for the elites who caused the crash of the 1980s. Moral hazard applies. No one was punished for this. They remained in power and simply looted the exchequer again when the coffers were full. It’s that simple.

The only real scrutiny in this country is being provided by Constantin Gurdgiev and the economists who write on this blog and who dare to criticise public policy. You guys are the true patriots.

Stephen Kinsella said...


I was there, here's my take, McArdle was completely out of order.