Economics 23/06/2010: On Financial Services Tax

This is an unedited version of my article in the current issue of Business & Finance magazine.


Behind the headlines about the ongoing eurozone fiscal crisis, three significant events have taken place on both sides of the Atlantic in recent weeks.

First, in April, assets under management in hedge funds domiciled in North America reached above $1 trillion mark for the first time in 18 months. Currently, North American funds account for two thirds of the total global assets under management.

Second, both the US and Canadian governments, preparing for the upcoming G20 summit have signalled their unwillingness to join European leaders in their crusade against financial markets. In fact the US has taken a distinctly different approach to dealing with the aftermath of the financial crisis, focusing on banks stability and addressing balance sheet risks in the recent finance reform packages that cleared US Congress.

Third, bloodied and bruised by the bonds markets and the voters, European politicians, led by Angela Merkel, have been gearing up for an all-out fight with so-called financial speculators.

As unconnected as these events might appear today, make no mistake, should the EU continue down the path consistent with its recent rhetoric, Toronto, New York, Chicago and Boston, alongside other major financial services centres around the world will be boom towns courtesy of the investors fleeing populist and politicized EU.


German plans for an EU-wide revision of fiscal and financial architecture range from suspending voting rights of the member states to national bankruptcy proceedings, from regulating hedge funds to introducing a tax on financial transactions.

A global or at the very least an EU-wide financial services transaction tax has been an on-and-off topic of discussion amongst the member states and Brussels for some years. Back in 2006 I was asked to review one of such proposals for a senior European decision maker from one of the continental member states. Having systematically overtaxed and overspend their economies, European sovereigns have been seeking new means of getting their hands on taxpayers cash since at least 2002-2003. Like a junkie in a desperate search of the next hit, the EU states are now searching for a convenient and politically, if not economically, easy target to mug. A Tobin-styled transaction levy on financial instruments is just that.

Transactions tax has been proposed back in 1972 as a theoretical construct to reduce the volumes of high frequency trading in foreign exchange markets. The rationale for it was a naïve belief that currencies should only be traded internationally for the purpose of physical commerce – exporting and importing. Any other trading, such as using foreign exchange as either a hedge or a flight to safety instrument against inflation, low economic growth, excessive state graft on personal income, sovereign insolvency and other fundamentals was viewed as speculative. In reality, modern currency is cash and cash is more than a facilitator of physical transactions. It is an asset.

Fallacious in application to Forex markets, Tobin tax would be even more erroneous were it to be applied to a broader set of financial instruments.

Take Ireland: a gravely sick financial system with plenty of financial services taxes, including a stamp duty on transactions. Has the presence of the Tobin tax here helped to prevent or even moderate the crisis? No. Worse than that, over the last 5 years, Irish markets have shown remarkably high volatility, despite having one of the highest stamp duty rates in the developed world. If anything, our stamp duty can be blamed for artificially reducing liquidity in the Irish stock market and, as a result, for adversely (albeit extremely modestly) contributing to the collapse of Irish shares.

Sweden toyed with transactions tax on financial markets back in 1984, imposing moderate levels of a stamp duty on stocks and derivatives. Within one week of the new law coming into effect, Swedish bond market saw an 85% collapse in volumes traded, futures trades fell 98% and options trading ceased all together. Swedes finally abandoned this self-destructive tax in 1991. Finland faced exactly the same experience. Japan was forced to abandon Tobin-style tax in 1999. Switzerland – a global financial services hub – does charge, in theory, a transaction tax, set at a fraction of the one Germany is rumoured to favour. However, in a typical example of Swiss flexibility, authorities there have power to grant exemption from this tax for specific investors.

OECD has issued the following official position on Tobin-style taxes back in 2002: “A “Tobin tax” penalises high frequency trading without discriminating between trades which may be de-stabilising and those which help to anchor markets by providing liquidity and information. Indirect evidence from other financial markets where a securities transaction tax has been in place suggests a substantial effect on trading volume but either no effect, or a small one of uncertain direction, on price volatility.”

Tobin tax will not work for Europe:

The tax is avoidable by conducting trades and structuring portfolia outside the EU. The end game will be higher cost of capital raising for European companies, selection bias in favour of larger companies in access to the capital market, selection bias in favour of larger financial assets trading platforms, to the detriment of smaller exchanges, and lower after-tax returns to investors. Which part of this equation makes any economic sense?

The tax will not fund sufficient insurance cover for future crises. Given the magnitude of bailouts witnessed in the last two years, the levels of taxation would have to be so high – well in excess of benign rate of 0.1-0.2% currently levied in some countries – that there will be no European financial markets left.

This tax on financial transactions will retard economic development in Europe for decades to come.

One of the reasons why European banks are so sick right now is European companies’ disproportionate, by international standards, over-reliance on debt financing. This contrasts the US corporates, which use more equity financing to raise capital. When the debt financing meets an asset bubble, banks balance sheets swell with bad loans. There is no equity cushion on European corporate balancesheets to underwrite the resulting losses. Instead, taxpayers get thrown to the wolves to rescue banks. Mrs Merkel & Co latest plans for ‘reforms’ will, therefore, mean even greater risks of bailouts in the future, and less growth and fewer jobs.


Next, of course, in Berlin’s line of fire were the hedge funds. Per populist rhetoric in European capitals, they had to be reined in because… well, no one actually knows, why. Hedge funds did not cause the current fiscal crisis (they had no control over the EU governments’ borrowing and spending excesses), nor did they cause the crash of our financial systems (hedgies did not pollute banks balance sheets and account for no more than 5% of the global financial assets). The hedge funds are not responsible for the property bubble or for exuberant stock markets overvaluations achieved in 2007-2008 worldwide.

The sole reason for this ‘reform’ is that for European leadership, ‘Doing right’ means ‘Doing politically easy’. Hedgies have no strong political lobby backing them, unlike banks, property developers, sovereign bondholders and issuers, or civil servants. So the EU prefers to attack a bystander in order to pretend that we are tackling the criminal. While taxpayers are being skinned alive to rescue reckless governments and banks, hedge funds are being presented as villain supremo. Farce? No – it’s politics.

After hedgies, came in even more sci-fi villains. Following Mrs Merkel’s ‘reforms’ talk, Germany banned naked short-selling and the trading of naked credit default swaps in euro zone debt. It turns out that European crisis was, after all, not about absurdly high levels of public debt carried by the PIIGS, nor by fraudulent (yes, fraudulent) deception by some countries of European authorities and investors about the true extent of national deficits. It was not exacerbated by the decade-long recessions turning into bubbles of exuberant lending and borrowing by companies and households, nor by a resultant severe depression that afflicted Euro area since 2008. The cause of these were the investors who were betting on all of these factors adding up to an unsustainable fiscal and economic situation in Europe. Farcical, really!

Worse than that, on top of the ridiculous financial services policies decisions Chancellor Merkel has also been working hard “on far-reaching changes to the treaty underpinning Europe's common currency”. German government would like to increase monitoring of member states' annual budgets, the introduction of stiff sanctions for those in violation of euro-zone debt rules and the suspension of voting rights in the European Council. Furthermore, Germany wants to establish “bankruptcy proceedings for insolvent euro-zone countries.”

The problem with the first part of Mrs Merkel’s fiscal policy proposal is that there are no independent organizations in Europe left that could oversee member states’ budgets. The ECB is a full hostage to Europe’s whims on monetary policy, engaging in the most reckless forms of monetary interventionism known to mankind – direct purchases of risky states’ debt. Outside the ECB ‘Yes, Minister’-styled ‘independent’ states-sponsored institutes populate the realm of European economic policymaking. By-and-large, they have no capability of delivering any independent analysis. Even the likes of the OECD – a very capable organization with some degree of independence – is subject to direct political and bureaucratic interference from its own members.

As far as German proposals for euro zone rules enforcement go, member states that do not conform to deficit reduction rules will be temporarily cut off from receiving structural funds. The galling dis-proportionality and lack of realism in this proposition does not even occur to the EU leaders supporting the idea.

Greece today is recipient of €110 billion bailout. Will suspending a few billion worth of discretionary structural funds commitment be a significant deterrent to a state like that?

This idea is potentially quite dangerous economically. Structural funds go to finance long term infrastructure investment programmes which often rely on co-funding from the Member States and/or private partners. All have private sub-contractors. Withholding EU funds will either destabilise these investments (if the measures to have any punitive powers), thus preventing economic growth necessary for fiscal stabilization or will do nothing. In short, Mrs Merkel’s proposal is a cure that threatens to make the disease incurable.

Earlier in May, German officials also mentioned the possibility of suspending member states' votes should they find themselves in violation of European debt rules. Of course, should this come to pass, Italy, Greece… no wait virtually the entire Eurozone, including Germany will have to be suspended from voting.


In short, in contrast to the US Congressional blueprints for financial sector reforms, European proposals to date can be described as a bizarre amalgamation of the impossible, the improbable, and the outright reckless. Their likeliest outcomes would be a large scale capital flight out of Europe and perpetuation of the status quo of continued sovereign and banks bailouts across the continent. Already struggling under the unsustainable burden of European taxation, the real economy – exportable and non-traded services and manufacturing – will be left holding the bag for these politically driven ‘reforms’. In addition to having an acute solvency problem, the EU will be saddled with a crippling lack of liquidity that only financial markets can provide.

Economics 21/06/2010: Innovation economy - Irish Banks' Style

Corrected version: hat tip to Mack

One must commend the Sindo team for putting forward series of articles this weekend on negative equity. One linked here refers my statement, contained in a series of posts on the subject I published here, here and here.

Now, in a farcical move, the Irish banks are apparently working on a scheme to allow negative equity homeowners to roll their mortgage in excess of the value of the house into a new mortgage (details are here, alongside some good analysis). Now, suppose you have a LTV 80% (at origination) mortgage for €400K on a property bought in 2006 and in 4 years since your family has grown in size. You weren't reckless then - borrowing only 80% of the value of the house, and you are not greedy now - requiring just an extra bedroom for those additions to the family. Below are summary estimates of the deal the banks are working out for you as we speak:
In other words, were you to fall for the trap being set up by the banks under the guise of 'We are doing our bit to help people in trouble', you will be either pushed into a 162% LTV ratio 30 year mortgage (good luck getting out of this level of debt with an asset in surplus value) or you'd have to pony up €197,400 for the privilege of seeing your mortgage shrink by €36,000 (the difference between what remains on your mortgage today and the mortgage you'll be taking out under the deal.

This deal is, in short, a pure hogwash for the majority of people in negative equity. The farce will be when, following the deal release into the market, our Government and its paid-for 'analysts' start cooing over the great rescue package for the hardest hit families... Watch their lips.

Of course another amazing thing here is that after all the talk about barring 100% mortgages, the new product will push more vulnerable households into mortgages multiples of the 100% leveraging. Happy times are just around the corner folks.

At 4% annual growth in house prices, the new mortgage will yield a break-even between the debt and the asset value by the end of 2023, not factoring in the costs of repayment. The old deal, were the household to continue with the existent mortgage, would have recovered by the end 2020. Hmmm... looks like our real estate brokers are just a month or so away from a rush of purchasers into the market with this kind of 'new products engineering' courtesy of the Irish banks.

But pardon me for asking. The same homeowners who are about to be offered this 'new deal' by the banks are also providing cost-free rescue to the banks themselves, their management and bond holders, while subsidizing shareholders and developers. 'Mortgage holders' from the development end of business have non-recourse loans worth tens and hundreds of millions. They are being offered a full write-off with virtually no consequences. Households in negative equity are being asked to pay for that, plus to engage in reckless financial engineering projects. Am I getting something wrong here, folks?

Economics 20/06/2010: Ideas that (allegedly) will change the world 2

Continuing with those 25 ideas for the 21st century:

Number 4:

“The Second Law of Thermodynamics, that every engineer knows well, says that the entropy of complex systems will inevitably increase over time. In other words, the system's capability will deteriorate. However, a more recent law, from evolutionary biology, says that the capability of complex systems evolves and improves over time. Engineering concepts guide not only machine designers, but also organization designers. Thus organizations are "engineered" and "reengineered," and "levers" are put in place for their masters to make the machine work and the organization to perform. …And in this concept, a boss on top with authority over the rest is necessary to put discipline into them.

In contrast, consider a rich tropical forest, humming with myriad forms of life supporting each other. Who is in charge? There is a mystery of organization in these forests. Complex self-adaptive systems, like the tropical forest, are organized according to the laws of evolutionary biology, and not the laws of machines.

[Ok, let’s pause and do take time to consider a rich tropical forest system. It is humming. Indeed, it is singing with individuals of various species consuming each other – not exactly a model for the ‘humanism’ of the contribution Number 3 to the list, is it? Over long run, entire species disappear. Not a real model for sustainable humanity. The balance of the forest eco-system is maintained by the precise order of life forms in the hierarchy of who kills whom. Not exactly a model for equality or for social mobility, or indeed for any sort of human rights. So if this stuff about ‘systems’ and ‘learning from the forests’ was to be really useful, it will have to apply only to hierarchical, non-horizontal or rights-based systems. A bit limiting, I’d say. By the way – in the tropical forest and indeed across the entire natural world, the one who’s on top of the food chain is “a boss on top with authority over the rest”… too bad Forbes’ visionary writing about this stuff didn’t bother to check it out himself by taking a camping trip to, say, Grizzly Bear territory armed with nothing more than a flashlight. He’d learn very quickly who’s the boss there and just how much ‘on top with authority’ this boss will get with our visionary]

“The first Enlightenment made man believe that he and his machines could master nature. [Well, we did master large chunks of the nature.] The second Enlightenment will come about with man learning from nature, and realizing that he is a part of it, not the master of it. [Fair play] …Within it lies an ability to produce innovations and to adapt and evolve. In the architecture of complex self-adaptive systems lie clues to the design of organizations in which the constituents work together to create a whole from which they all benefit...

An idea that will change the world for the better for everyone is a new architecture of organization learned from nature and other complex self-adaptive systems. With this architecture, we will get better governance and more co-operation across boundaries. Working together, many organizations may improve the condition of India's children. And, working together, humanity may accelerate its progress towards the Millennium Development Goals, and even mitigate climate change.”

[I’ve had enough. Two things –

1. Yes, self-adapting systems are cool. Not futuristic, really, but cool. And have room to be deployed more.
2. But the idea that cooperation is superior form of organization is pure ideological hogwash.
   

So far, human progress was driven by equal doses via cooperation and competition, with both being driven not by benevolence, but by self-interest. One can even interpret benevolence as a self-interest, with a small and fully legitimate re-interpretation of utility theory. So no, self-adaptive systems won’t do much for India’s children, unless there is a serious fully functional market system that assures a steady progression for India along growth curve. And no, the Millennium Development Goals won’t do much good either, for these goals are really more about taxing the developed countries of the West with a guilt charge to supply subsidies to the existent regimes in the poor parts of the world. The poor are, really, a bit like an actor in a commercial for bottled water. He might be thirsty, but he doesn’t get to drink that water.]


Number 5:

“The tragedy of modern atheism is to have ignored just how many aspects of religion continue to be interesting even when the central tenets of the great faiths are discovered to be entirely implausible. …In the light of this, it seems evident that what we now need is not a choice between atheism and religion--but a new secular religion: A religion for atheists.”

[Irony has it, but the good philosopher who wrote this doesn’t quite get the point that from the logic point of view, atheism is a form of religion – it is faith-based as any religion is, and is dogmatic in its acceptance of the first principle that God does not exist]

“What would such a peculiar idea involve? For a start, lots of new buildings akin to churches, temples and cathedrals. We're the only society in history to have nothing transcendent at our centre, nothing which is greater than ourselves. In so far as we feel awe, we do so in relation to supercomputers, rockets and particle accelerators. The pre-scientific age, whatever its deficiencies, at least offered its denizens the peace of mind that follows from knowing all man-made achievements to be inconsequent next to the spectacle of the universe.”

[Spot the contradiction here – if we are the first culture that has nothing transcendent at our core, then we are the culture that does not treat anything as being eternal. Which, of course, means that we cannot de fact believe that any of our achievements can transcend ‘the spectacle of universe’. By the same argument, past cultures, by believing that they left something behind – buildings, temples etc, but always man made – that transcended time had to believe that the ‘spectacle of universe’ was at the very least equaled by their own legacy left for posterity. In other words, the author is clearly logically wrapped up in contradictions here once again.]

“A secular religion would hence begin by putting man into context and would do so through works of art, landscape gardening and architecture. Imagine a network of secular churches, vast high spaces in which to escape from the hubbub of modern society and in which to focus on all that is beyond us.”

[Museums and art galleries as cathedrals? Unquestioned, accepted on faith? Not tested by either time or repetition? Artists as ‘creators’ of a divine license? This is really something closer to the heart of communists and fascists – both have attempted to use art as a vehicle for propagation of the ‘ultimate truth’ – although both have had some artificial (and disastrous in quality) systems of controls over the messengers.]

“In addition, a secular religion would use all the tools of art in order to create an effective kind of propaganda in the name of kindness and virtue. Rather than seeing art as a tool that can shock and surprise us (the two great emotions promoted by most contemporary works), a secular religion would return to an earlier view that art should improve us. It should be a form of propaganda for a better, nobler life.”

[Goebels would approve… as would Stalin. But would modern artists, operating on the basis of personal freedom of expression – which includes freedom to shock, to surprise, to… well, to ‘not be a part of any propaganda’ – approve? I doubt it.]

[At this point, I must say the idea of a secular religion – as espoused by the author here – just doesn’t appeal to me. It is a prescription for totalitarian control, with the ideology of a master race being replaced in its ‘posters’ by the ideology of ‘better and nobler life’… One wonders if there ever was a totalitarian regime, internecine and all that ever postulated its objectives of not achieving a ‘better and nobler life’? The road to Hell is always paved with good intentions... and, may I add, often well-decorated with art...]

Economics 19/06/2010: Ideas that (allegedly) will change the world 1

Forbes Magazine has published a list of 25 ideas that will change the world in the 21^st century. The list is available here. Let's take a look. Some are quite interesting, others are banal...

I’ll be blogging about it over the next few days.

Number 1.
"In coming years, increasingly larger amounts of capital will come into the financial system. ...India, China and a few other developing economies will attract a much larger portion of foreign savings. …This increased flow of capital presents us with a unique opportunity to transform [Indian] society. …the financing, investment and risk management needs of companies and governments are growing in size and complexity, and financial institutions should have the ability to support this growth.”

[So far, nothing new – investment into Brics has been growing steadily and the trend is likely to continue for some time assuming:

1. Massive Government-fuelled credit and spending expansion in China continues
2. Massive Government spending-fuelled expansion in Brazil continues (for the record – Brazil’s fiscal deficit is reaching beyond 13% per annum at the time of rapid economic growth – if one ever had a more pro-cyclical fiscal policy than that and didn’t end up in ditch afterward, do let me know)
3. India can supply significant translation of internal growth into external and expatriable revenue for companies without either running a massive inflation or grinding to a halt on the back of collapsed exports demand
4. Russia returns to robust growth – though in the case of Russia, there is little chance the country does not really attract massive external funding outside extraction industries.

But the thing about these countries swallowing a greater share of Western savings is probably true, for some time. Not sure if it will last through the 21^st century]

“Technology will play an important part in this transformation, because it has the ability to break access barriers and bring down transaction costs to a fraction of what they are today. …One such transformational change will come from mobile payment systems.” [An interesting, but not very ‘futuristic’ view – the view that few would disagree with]

“Technology will enable Mutual Funds to sell and service much smaller investment units and insurance companies to sell much smaller policies than they are able to do now. [Alas, mutual funds industry is hardly a cutting edge stuff. Especially since ETFs offer much more at much lower costs. And they do not need any new technology to offer their services to smaller investors] …Similarly, processing small loans and small insurance claims will become faster and easier... Databases with credit histories, and Unique Identification systems will allow financial institutions to reduce risk when they make loans or provide other financial services.” [I am not sure that risk management is a matter of technology bottlenecks. While computational and data processing power can help, it can’t alleviate the problems of modelling and pricing risk, or the problems relating to catastrophic risks, or the much more salient – from Bric’s perspective – problem of basic individual risks inherent in the client base. Machines might change the modes of analysis, but they can’t change the default probabilities of people.]

“The impact of technology is not limited to retail financial services alone. At the core of the financial system where equity, credit, currency and other risks are traded, we need deep, liquid and resilient markets. Technology is helping these markets enormously, and playing an important role in improving efficiency of capital allocation and risk management.” [Yes, but… the speed of order systems in world’s leading exchanges is now so much faster than the speed at which information is delivered to the public and even recorded, that we have clearing and disclosure systems operating at slower speeds than booking systems. It is a serious concern]

[I am not really convinced the idea of India’s and emerging markets financial revolution is… well… all together so revolutionary. Looks like a simple linear projection of a trend.]



Number 2: the emergence of non-English language based cultures on the web.

“…culture does get transmitted; the early adopters, eagerly working on the [African languages] Internet, say, will also be speaking English or French, and they will transmit best practices. It won't take as long as it did the first time. …You already have the 3G mobile network so basically you just need a device to connect. The questions are what devices they will use to connect and when those devices will become affordable. Like with telephony, where people who have never had a landline leap straight to mobile phones, we will see people who have never had an Internet connection leap straight to broadband.”

[An interesting point, but again, hardly revolutionary. In fact, most of hardware referred to above is clearly already in place or being put into action. Its price is collapsing rapidly, including in emerging economies. African consumers of mobile data are pretty much identical in their patterns of consumption to those in the West or Asia. The question is about ‘software’ of culture, of language. A person, say in Africa, can opt for the use of a local language and local culture, drawing on few thousands in terms of potential market for their ideas and content. Or the same person can opt for English or French or Spanish or Chinese. Foreign language merging with foreign culture will not only open the culture up to a larger scale market, but it will also lead to more interesting interaction between language and culture, potentially leading to a development of (at first) non-convergent sub-cultures that will inhabit the web alone and will have only loose (or even superficial) connections to the original culture itself and to the language-based system they utilise on the web. Now, that’s a revolutionary idea – not a transformation of existent cultures, but their mutation into new cultures. The next question is – following convergence of communications, will there be a convergence of atomistic new web-based cultures? Will the web lead to the emergence of a truly global, non-localized culture? And here is another ‘futuristic’ idea for you that comes off the same core – once convergence of technologies and communications takes place, the next step will be to merge these with biological systems. Then, new cultures – until then existent solely in the virtual world – will become physical – or biological. What happens next? Imagine your children’s computer games acted out in real physical universe? May be not by 2030… but what about by 2050?]


Number 3:

“There is a strange paradox at the heart of human nature. We humans are the most sociable creatures on earth, with a remarkable ability to cooperate with one another. … Human beings are also creatures of unparalleled ferocity. No other animal is capable of the horrors--the wars, genocides, torture and oppression--that we have regularly visited upon our fellow human beings. This is all the more perplexing because killing does not come easily to us. …What goes on in the human mind to make… brutality possible? We dehumanize our fellow human beings when we convince ourselves …that they are less than human... The immense destructive power of dehumanization lies in the fact that it excludes its victims from the universe of moral obligation, so killing them is of no greater consequence swatting a mosquito, or poisoning a rat. If dehumanization is a key factor in war and genocide, we ought to be working very hard to prevent it.”

[This is more like a real 21st century challenge, although the humanitarian dream has been with us for a very, very long time. One interesting aspect of the entire idea of finding a ‘cure’ for cruelty and inhumanity is that all, even theoretical, ones seem to lead to a mind control and totalitarian suppression of thought in general. And the article on the topic linked above leaves absolutely no clues as to how we can resolve the truly horrific problem of dehumanization without actually dehumanizing ourselves in the process.]

Economics 19/06/2010: A quote

An unexpected quote (hat tip to Open Europe):

"What went wrong wasn't what happened this year. What went wrong was what happened in the first 11 years of the euro's history. In some ways we were victims of our success...It was like some kind of sleeping pill, some kind of drug. We weren't aware of the underlying problems".

European Council President Herman Van Rompuy, 14 June 2010

Perhaps the only thing worth disagreeing here with is the idea that 'we weren't aware':

1. 'I didn't know' is not a legitimate defense for sleeping on the job.
2. Why weren't they listening?
3. Will anyone bear the consequences?
   

Economics 18/06/2010: Banks, bonds and banks again

Brian Lenihan confirmed yesterday that the Government is now seeking an extension of the bank guarantee scheme by 3 months to the end of 2010 to coincide with capital requirement deadline set by the FR. The extension with cover new liabilities of 3mo-5 years and will not cover subordinated debt. This was expected, given the profile of maturing banks debt and the dire conditions in the funding markets where investors have been reluctant to extend new funds to Irish banks (based on the high risk perception concerning the sector and geography) and the interbank lending markets remain in elevated yields territory. Sovereign spreads reaching 313 bps for 10 year paper over the bund are not helping either, record levels, indeed.

Added uncertainty weighted on the banks is stemming from the rumors surrounding the issue of regulatory controls that the Central Bank is expected to impose on banks loans distribution across various sectors. It is expected that the CB will push (next week?) for specific maximum exposure ceilings on lending to property sector for banks. If so, this will require serious re-thinking of Irish banks models away from the traditional reliance on property-based collateral deals going to finance more property-related investments and in favour of more business and consumer oriented banking.

The winner - of the Big 4 - here will be BofI, which has a much more customer-oriented model of consumer banking than AIB (not to mention ptsb or Anglo). But all banks will find it challenging to bring in more consumer orientation in the environment where thy are trying to push up margins on existent paying clients. And even more importantly, all banks will find it difficult to enter serious business investment markets.

Meanwhile, on wholesale funding side, things are now so desperate that the EU - never the first to push for greater transparency - is being forced to publish the results of stress tests on the region’s banks. Expected before the end of this month, the tests are likely to be a hogwash - Merkel already stated that the 'EU has taken precautionary measures' in relation to stress tests results. Whatever this might mean, one wonders.

There's an excellent post on econbrowser blog (here) on the extent of the PIIGS banks problems and the expected size and geographic distribution of potential contagion. A chart below says it all:
I mean, really, folks, we beat Greece and Portugal as a combination. And for UK banks, we beat all other 3 sickest puppies.

Economics 16/10/2010: Organizational systems and uncertainty

I came across this very interesting, and to me - far reaching - paper on the effects of organizational structures on the organization's ability to cope with uncertainty and change. Karynne L. Turner, Mona V. Makhija. “Measuring what you know: an individual information processing perspective” (April 15, 2010). Atlanta Competitive Advantage Conference 2010 Paper (here).

According to the information processing perspective, the organization’s ability to draw upon and utilize information is dependent on the relationship between structure and the ability of individuals to process information, facilitated by specific organizational aspects of the firm. The study considers the effect of two types of structure, organic (integrated or systemic) and mechanistic (siloed), on individuals’ ability to gather, interpret and synthesize information, and their problem-solving orientation. Evidence shows that individuals develop more information processing capability under organic than mechanistic structures, which in turn creates more problem solving orientation in individuals.

In short, the study lends support to the premise that better integrated, more diversified across skills and less siloed organizations produce more effective and efficient gathering, processing and interpreting of information, as well as better problem solving.


Effective management of knowledge is the basis of firms’ ability to compete (Zander and Kogut, 1995; Nonaka, 1994). This is achieved through organizational design (Teece at al., 1997) that underlies “the means by which firms acquire, disseminate, interpret and integrate organizational knowledge”.

Organizational structure embodies a number of key elements, such as control and coordination or management mechanisms, and human capital management that allocate tasks to work units and individuals, and coordinate them in a way that achieves organizational goals. The manner in which this is done is critical due to problems created by

• External uncertainty associated with suppliers, competitors and consumer demand (Gresov and Drazin, 1997; Sine, Mitsuhashi and Kirsch, 2006), or
• Internal uncertainty, due to the complexity of internal coordination, measurement difficulties and changing processes (Habib and Victor, 1991).
  

Uncertainty reduces the effectiveness of pre-established routines, technologies or goals, and increases the importance of problem solving (Becker and Baloff, 1969)). The more work related uncertainty increases, the greater the need there will be for information processing (Turner and Makhija, 2006 and Tushman, 1979).

One way in which an organization addresses uncertainty is by assigning specific responsibilities to specialized subunits, which collect, process and distribute information acting as “a set of nested systems” (Daft and Weick, 1984).

Literature distinguishes two types of organizational structures, mechanistic and organic. These structures differ in the distribution of tasks, the flow of information among individuals and across units, and the extent to which there is interaction with the environment (Shremata, 2000; Gibson and Birkinshaw, 2004).

Mechanistic forms of organization are characterized by hierarchical division of labor, in which communication tends to be in one direction – top to bottom. Individuals develop deep expertise in their own designated jobs, which tend to be clearly specified and specialized in individual knowledge. The mechanistic structures do not allow for much flexibility (Parthasarthy and Sethi, 1993).

Organic forms of organizations are based on horizontally-administered teams, in which all members participate in management decisions (Baum and Wally, 2003), allowing for worker autonomy, responsibilities adaptation. Team members developing competence across multiple tasks, thus diversifying their skills and knowledge sets. Individuals have broader unit-level knowledge rather than just one job and develop greater flexibility.

The structural differences between mechanistic and organic organizational forms are likely to influence the development of information processing capability in organizational members, reflected in organization’s ability to gather, interpret and synthesize information. Turner and Makhija (2010) consider the impact of different types of structures on each of these three aspects of organizational members’ information processing capability.

Turner and Makhija (2010) postulate a set of testable hypotheses all of which are confirmed:

H1: Organic structures lead to more gathering of information than mechanistic structures.
Implication: uncertainty is reduced in organic (integrated or more horizontal) structures through reduced information asymmetries vis-à-vis external environment.

H2: Organic structures lead to more similarly interpreted information than mechanistic structures.
Implication: information asymmetries are reduced across the broader range of the organization structures in the organic setting.

H3: Organic structures lead to more synthesized information than mechanistic structures.
Implication: organic systems are better capable of integrating information of various types.

H4: More gathering of information is associated with greater problem solving orientation.
Implication: organic systems are better able to cope with converting uncertainty into manageable risks systems.

H5: More similarly interpreted information is associated with greater problem solving orientation.
Implication: better information processing in organic systems results in better problem solving, so information is used more effectively.

H6: More synthesized knowledge is associated with greater problem solving orientation.
Implication: individuals also tended to synthesize, or understand the interrelationships among different types of information, much better than individuals working in mechanistic structures.

H7: Information processing capability mediates the relationship between organizational design and problem solving orientation
Implication: the effects of individuals’ information processing on their problem solving orientation is greater in the organic structures, reflecting their comfort with problem situations in their work.

Turner and Makhija (2010) research shows that, when operating in two different types of structures, individuals process information differently in all three respects: gathering, interpreting, and synthesizing information.

These findings have several far-reaching implications for the organizational structures found in Ireland.

Firstly, it is clear that hierarchical and fixed systems approach to public services provision – characterized by the lack of communications between vertically-integrated public sector departments and organizations leads to their inherently lower ability to absorb, process and implement informational processes that manage uncertainty.

Secondly, this shows why successful entrepreneurial ventures are horizontal in nature and less siloed.

Third, it shows that our political system – with disproportionate powers allocated to the executive, as opposed to more uniform distribution of powers between the executive, legislative and judiciary – is similarly to the public sector less equipped to handle uncertainty.

Economics 15/06/2010: Negative equity 3

Here is the third and last post in the series on negative equity based on my TCD speech (see here).

Rising negative equity has implications for financial stability:

Domestic mortgage lending by the major banks represents over x5 times their core Tier 1 capital in the UK and roughly 10 times in Ireland. Even post disposal of its assets (assuming rosy valuations), AIB’s multiple will be over x11 of its risk-weighted assets. BofI – x7-8. And these are the better ones of the Irish banking lot. In addition, around 40% of all outstanding UK mortgage debt has been used to back securities.

Large losses on these mortgage loans and associated securities can erode banks’ capital positions, affecting both lenders’ willingness and ability to lend and, in extreme cases, their solvency.

Both of the above effects can have implications for aggregate demand and the supply capacity of the economy, highlighting the interdependency of financial stability and monetary policy. Again, in the case of Ireland, the two effects are reinforced by the large exposure of the Exchequer to banks balancesheets and to the property markets.

The defining feature of the materialised losses, and their associated economic effects, is the value of debt at risk (loss given default) and the coincidence of that with the probability of default.

Rising negative equity has implications for loans default probabilities:

In economic literature, negative equity is a necessary condition for default to occur since borrowers with positive equity can sell their house and use part of the proceeds to pay off their mortgage. Transaction costs (high in Ireland) and transaction lags (also extremely long in Ireland) act to further increase this effect. For example, a household with positive equity of ca 10% will still trigger a partial default on the mortgage if it takes a year to close the sale (8% funding opportunity cost per annum) and if closing costs add up to 2% of the sale price.

However, negative equity is not a sufficient condition for default to occur, as discussed in “Negative Equity and Foreclosure: Theory and Evidence” by C. Foote, K. Gerardi and P. Willen (June 05, 2008, FRB Boston Policy Discussion Paper No 08-03). Similarly, in the UK, May and Tudela (2005) find no evidence that negative equity increased the likelihood of a household experiencing mortgage payments problems between 1994 and 2002, although their sample does extend over a lengthy period of robust economic growth and rising incomes. The latter two aspects of the sample are not present in today’s Ireland.

But, as Heldebrandt, Kawar and Waldron (2009) highlight, “if a household is experiencing difficulties meeting their mortgage payments, negative equity can increase the probability of default by reducing the household’s ability to make payments by preventing equity withdrawals.” Benito (2007) found that households are more likely to withdraw equity from their homes if they have experienced a financial shock. Negative equity can affect a household’s ability to do that because of credit constraints.

Furthermore, negative equity can increase the probability of default by reducing household’s willingness to make mortgage payments, since defaulting can reduce the debt burden of the household. In Ireland, despite our anachronistic bankruptcy laws, this option is still available for anyone willing to emigrate. You might as well call this www.book-your-one-way-ticket.ie effect, as households leaving Ireland fleeing bankruptcy will have:

1. a very strong incentive to emigrate; and
2. a very strong incentive never to return for the fear of debt jail.

Negative equity may significantly increase the probability of default of buy-to-let mortgages over and above that of owner-occupiers as costs of defaulting on a buy-to-let mortgage may be lower because defaulting does not lead to loss of residence. In addition, buy-to-let mortgages are, at least in some cases, registered via businesses, implying no recourse on family homes and wealth.

Overall, available economic evidence does suggest that negative equity plays a significant role in mortgage defaults:

• Coles (1992) presents results from a 1991 survey of lenders in which a high LTV ratio was frequently noted as an important characteristic of borrowers falling behind in meeting their mortgage payments.
• Brookes, Dicks & Pradhan (1994) and Whitley, Windram & Cox (2004) find that a reduction in the aggregate housing equity in the UK was associated with an increase in arrears.

Overall, Heldebrandt, Kawar and Waldron (2009) conclude that “evidence suggests that the level of household defaults, and the impact of negative equity on financial stability, is likely to depend on conditions in the broader macroeconomic environment”. And Ireland is at a clear disadvantage since the combined macroeconomic shocks (decline in GDP/GNP, rising unemployment and contraction in private sector credit) are much more severe here.

Rising negative equity has implications for the size of the expected banks losses:

When bank borrowers face negative equity, as probability of default and the value-at-risk in default rise, banks have an incentive to stave off the actual mortgage default. To do this, banks engage in:

• Renegotiations of covenants (loans extension, provision of a grace period, interest only repayments etc)
• In extreme cases – joint equity ownership in asset (though banks will usually engage in this type of transactions under regulatory duress)
  

All of these measures aim to put the borrower into a position to eventually repay the loan in full.

However, in cases where default in unavoidable, the loss to be realised by the bank on any given loan depends on the recovery that can be achieved if the borrower defaults. Negative equity, or positive equity that does not exceed the sum of the cost of carrying the loan during the sale, plus the cost of sale, will imply a net loss on the default. From the bank point of view, the problem is not in the actual level of individual defaults, but in the combined level (aggregate) of negative equity net of costs and recovery values.

Such net losses impact not only the actual mortgage book, but also securitised pools that can be held off balance sheet, as current negative equity puts at risk future revenue against which the book is securitised. The end result on mortgage backed securities side is to reduce the value of MBS asset and, as Heldebrandt, Kawar and Waldron (2009) point out this can induce a second order effect of changing risk perceptions and investors’ sentiment “regardless of the actual performance of any given portfolio of loans”.

Both types of losses lead the banks to record write downs on their mortgage books and securities held. If these are large enough, banks’ capital ratios will be reduced.

In the case of Ireland the problem is compounded as the banks are actively delaying recognition of losses on negative equity. These delays mean that banks are likely to pay elevated costs of external funding over longer period of time. In addition, these delays lead to losses compression – the situation where banks recognize significantly larger volumes of impaired assets later in the crisis cycle. Bunching together losses creates a much more dramatic investors’ loss of confidence in the bank.

In addition, negative equity-driven impairments, plus delayed recognition of such impairments lead to suboptimally high demand for capital from the banks. If this coincides with the period of severe credit crunch, monetary policy aimed at increasing economy-wide liquidity flows can become ineffective, as banks park added liquidity on their balance sheets, creating a liquidity trap. This is evident throughout the crisis, but by all possible monetary policy metrics, it is much more prevalent in Ireland, where even today credit available to the private sector continues to contract. Irish banks are hoarding liquidity and are raising lending margins to offset expected, but undisclosed writedowns. This problem is compounded by Nama which induces greater uncertainty onto banks balance sheets through its hardly transparent or timely operations.

Negative equity and generational asset gap:

In Ireland, the problem of negative equity is further compounded by the generational spread of negative equity to predominantly younger, more productive and more mobile (absent negative equity) households. These households today face higher probability of unemployment (thanks to our unions-instituted and supported ‘last in – first out’ labour market policies). They also much deeper extent of the negative equity because of higher cost of financing their original mortgages and entering the housing market.

The generational effects of negative equity are compounded by geographic distribution of the phenomena – with younger households being more likely to reside in the areas of excess supply of new housing, with poor access to alternate jobs, should they experience unemployment.

Finally, it is the younger households that are subject to twin effects of higher probability (and deeper extent) of negative equity and depleted savings (due to high cost of entry into the housing market). This implies that it is the very same households which have the greatest incentive to engage in precautionary savings motive.


So traditionally, economies grow by:

• encouraging the young to acquire new assets (invest and save); and
• encouraging the old to consume (divest out of savings).

With negative equity, Nama and pressured banks margins, Ireland is:

• forcing the better (more productive today and in the future) young to emigrate;
• keeping the remaining young deep in the negative equity (neither capable of investing in the future, nor of moving to find a lost job today);
• underwriting - at the expense of younger, tax paying generations - continued excessive provision of pensions to retired public sector workers;
  
• forcing younger families to cut deeper and deeper into their children education budgets and own training and education funds in order to assure they continue paying on the asset that will never have net positive return on investment; and
• incentivising the old to remain in their highly priced (if only rapidly losing value) homes backed by slacked consumption due to inability to monetize their pensions savings.

In what economics book is this scenario better than any moral hazard problem that can be incurred in the short run by reforming our bankruptcy system to an American-styled 'restart' button?

Economics 15/06/2010: Negative equity 2

This is the second post of three consecutive posts on the effects of negative equity in Ireland.

Negative equity can lead to a reduction in consumer spending, collateral & credit

This can take place via four main pathways:

1. Housing equity can be used as collateral to obtain a secured loan on more favourable terms than a loan which is unsecured. This channel for lower cost financing is cancelled out by the negative equity.
2. Falling collateral values may also affect the cost of servicing existing mortgages if borrowers have to refinance at higher interest rates when their existing deals expire (eg when exiting temporarily fixed-rate or tracker mortgages). That would reduce income available for consumption, which may further reduce demand.
3. Households on adjustable rate mortgages are facing additional pressure of higher banks margins. Since vintages of many ARMs are coincident with 2005-2007 period, negative equity has direct and significant impact on them. Nama exacerbates this impact by forcing banks to up their margins on performing loans, pushing more and more households into not just negative equity, but virtual insolvency.
4. Fourth, falling values of housing equity also reduce the resources that homeowners have available to draw on to sustain their spending in the event of an unexpected loss of income (eg due to redundancy, illness or a birth of a child). By reducing the value of housing equity, falling house prices may lead some homeowners to seek to rebuild their balances of precautionary saving at the expense of consumer spending and investment.
   

Note that precautionary savings are held in highly liquid demand deposits – a fact that I will use below. In general, households with high amounts of housing equity may not respond much to falling house prices, because their demand for precautionary savings balances may already be satisfied through their positive net worth balances on the house. Households with low or negative equity have an asymmetrically stronger incentive to save in a form of short-term deposits.

Rising negative equity can also result in a reduced supply of credit to the economy as a whole:

Negative equity can raise the loss that lenders would incur in the event of default (loss given default) and the probability of a loss. That can make banks less willing or able to supply credit to households and firms.

Per Benford and Nier (2007) Basel II regulations, which require banks to hold more capital against existing loans when their anticipated loss given default rises, can reinforce that.

If credit is more costly or difficult to obtain, households and firms are likely to borrow less, leading to lower demand through lower consumer spending and investment. This, in turn, can lead to reduced business investment.

Expectation hypothesis suggests that negative equity effects on willingness to borrow and lend can extend beyond those immediately impacted as other households anticipate their own asset value decline toward negative equity.

Blanchflower and Oswald (1998) paper showed that a reduction in credit availability may also have some effect on the supply capacity of the economy by reducing working capital for smaller businesses and the capital available for small business start-ups. In addition, a recent (June 2009) paper “Reduced entrepreneurship: Household wealth and entrepreneurship: is there a link?” by Silvia Magri, Banca d’Italia, published by the Bank of Italy (Working paper Number 719 - June 2009) shows that negative house equity can result in reduced entrepreneurship, as many new businesses are launched on the back of borrowing secured against primary residencies or other real estate assets.

Rising negative equity can also result in a reduced household mobility:

Negative equity can affect household mobility by discouraging or restricting households from moving house. Two fathers of behavioural economics, Tversky and Kahneman (1991) argued that households may be reluctant to move because they would not wish to realise a loss on their house. Notice, that our so-called ‘smart’ politicians often claim that negative equity is never a problem unless someone wants to move. Actually, it is a problem even if someone does not want to move, but has to move because of their changed employment or family circumstances.

Tatch (2009) shows that a household in negative equity would be unable to move if they were unable to repay their existing mortgage and meet any down payment requirements for a new mortgage on a different house. This is even more pronounced in Ireland due to the nature of Irish bankruptcy laws.

Hanley (1998) shows that the effect of negative equity on mobility were quantitatively significant during the early 1990s in the UK. The paper estimates that of those in negative equity in the early 1990s, twice as many would have moved had they not been in negative equity. The paper argues that reduced household mobility leads to a reduction in the supply capacity of the economy by increasing structural unemployment and reducing productivity.

Reduced household mobility implies a reduction in the number of households moving home. This can have adverse implications for tax receipts, spending on housing market services and certain types of durable goods as highlighted in Benito and Wood (2005). So as negative equity increases, tax revenues and economic activity in the housing sector and associated white goods sectors falls.

15/06/2010: Negative equity 1

Yesterday, I gave a speech at the Infinity Conference in TCD on the issue of negative equity (see newspaper report here). The following three posts (for the reasons of readers' sanity) reproduce the full speech.

What effects can negative equity have in the case of Ireland?

I did a troll of the literature on negative equity and below I summarize the main findings, relating some to the case of Ireland.

Broadly-speaking there are three dimensions through which negative equity can have an effect on Irish economy:

1. Macroeconomic channels via negative equity impact on aggregate supply and demand;
2. Monetary channels which lead to negative equity impacting adversely banks balance sheets and increasing the cost of default and probability of default for mortgage holders; and
3. Growth channels, which relate to the adverse effects of current negative equity on future demand and investment, and directly on growth.

Here are more detailed explanations of these channels.

Why the problem of negative equity is likely to be greater in Ireland than in the UK

A forthcoming paper “House Price Shocks and Household Indebtedness in the United Kingdom” by Richard F. Disney (University of Nottingham), Sarah Bridges (University of Nottingham) and John Gathergood (affiliation unknown), to be published in Economica, Vol. 77, Issue 307, pp. 472-496, July 2010, used UK household panel data to explore the link between changes in house prices and household indebtedness. The study showed that borrowing-constrained by a lack of housing equity households make greater use of higher cost, higher risk unsecured debt (e.g. credit cards or personal loans). Crucially, when house prices revert to growth, “such households are more likely to refinance and to increase their indebtedness relative to unconstrained households”.

These effects – present in the case of the UK – are likely to be more pronounced in the case of Ireland, because Irish households which find themselves in negative equity today experience much severe deterioration in their net worth base due to the following factors:

• Majority of Irish households have been forced to front-load property taxes into their purchase costs and often mortgages. Thus average LTVs are more likely to be higher here in Ireland, for more recent mortgages vintages, than they were in the UK.
• Ireland has experienced a much more severe contraction in house values than the UK to date.
• Because of significantly higher entry-level taxes, younger buyers in Ireland had to be subsidized more heavily by their parents than their UK counterparts, implying that once true levels of indebtedness are factored in, real mortgages and debts held against a given property of more recent purchase vintage might be higher than those recorded on the official mortgage books.
  

In many cases – we do not know how many, but anecdotal evidence suggests quite a few – credit unions and building societies, as well as non-mortgage banks were engaged as sources of top up loans to younger buyers, implying that once again the true extent of house purchase-related debt in Ireland, for younger households, might be higher than official records on mortgages suggest.

Another recent study, titled “The Economics and Estimation of Negative Equity” by Tomas Hellebrandt, Sandhya Kawar and Matt Waldron (all Bank of England) published in Bank of England Quarterly Bulletin 2009 Q2 looked at the effects and extent of negative equity between Autumn of 2007 and the Spring of 2009. Over that period of time, nominal house prices fell by around 20% in the UK, suggesting that negative equity impacted around 7%-11% of UK owner-occupier mortgage holders by the Spring of 2009.

By now, in Ireland:

• house prices fell down ca50% already (accounting for the swings in terms of premium to discount on asking prices – by closer to 55%),
• vintage of many purchases was much closer to the peak valuations, so
  

for Ireland, estimated negative equity impact is now around 35-40% of the mortgage holders.

Extent of negative equity here is compounded by:

1. High entry costs into the homeownership (100+% mortgages due to stamp duty costs and poor quality of real estate stock);
2. Lax lending – cross-lending by banks and credit unions and building societies;
3. Hidden nature of some of borrowing – parents’ top ups etc;
4. Coincident borrowing – with younger households being more likely to engage in borrowing for a mortgage, while borrowing for car purchase etc.
   

BofI, which holds ca 25% of all mortgages in the country (about 190,000) has reported that of these, more than 20% were already in negative equity (over 40,000) around the beginning of 2010.

The aforementioned Bank of England paper provides a good starting point for outlining the set of adverse impacts that negative equity can have on the Irish economy.

Negative equity can have implications for monetary policy:

A rising incidence of negative equity is often associated with weak aggregate demand as households in negative equity are more likely to cut their expenditures across two channels:

• due to reduced marginal propensity to consume out of wealth; and
• due to increased marginal propensity to save.

The direction of causation is not always obvious, implying a possibility of feedback loops – as households experience (or even anticipate) negative equity, they start reducing their borrowing against depreciating assets, the effect of which is amplified by the banks reduced willingness to lend against such assets. In addition, households rationally interpret these declines in today’s wealth as declines in future wealth, implying greater exposure to pensions under-provision in the future, plus greater exposure to the risk of sudden collapse in earnings (due to, say, unemployment or long term illness). As the result, these households tend to reduce their consumption today and in the future.

The reduced consumption leads to a loss of revenue to the exchequer and thus to additional pressures on future public pensions and benefits provision. This, in turn, leads households to further tighten their belts and attempt to compensate for the risk of reduced future benefits by lowering consumption exposures today.

Negative equity tends to become more prevalent when house prices fall, which usually reflects weak demand for housing, since housing supply is fixed in the short term. In the case of Ireland, this is compounded by the fact that we have severe oversupply of properties in the market. Demand effect, therefore, reinforces supply effect. Once again, in Ireland there is one more additional channel of induced market uncertainty due to Nama operations.

Weak housing demand often coincides with weak consumer demand in general, due to

1. reduced availability of credit to consumers and potential home buyers; and
2. precautionary savings as households respond to decline in their nominal wealth.

If negative equity leads to a further contraction in the availability of credit to both households and firms, as in Ireland – exacerbated in the case of Ireland by Nama – second order effects reinforce first order effects.

Lastly, as negative equity in Ireland is coincident with construction sector bust, we have twin effects of decreased households’ mobility and increased unemployment. This once more reinforces the uncertainty levels in the markets for housing, implying that risk-adjusted negative equity becomes even more pronounced here.

Economics 13/06/2010: Mapping Dublin's weight in economy

Here is an interesting set of data for some of the world's leading cities in terms of their contributions to country GDP and their share of total population. Sizes of the bubbles reflect the ratio of contribution to GDP to share of population. Greater Dublin is taken as per CSO: Dublin plus Mid-East region.
To me, this really does put into perspective the necessity for continued investment in the Greater Dublin region and the futility of our serial National Spatial Development Strategies.

We hear so much about the massive urbanization in the emerging economies, especially in the East. This process, in fact, is very much a reality. But what we do not hear about is urbanization of our own economic activity. The fact that Dublin stands out amongst the most urbanized zones, relative to the rest of the country, in the world is telling me that Ireland should focus more attention on developing the Greater Dublin region to reflect the reality of demand of the firms' and workers' for its location.

Updated: see the same chart with Dublin only:
Note: per CSO "The Mid East region (Kildare, Meath and Wicklow) and the Dublin region are affected by a substantial proportion of their workforce living in one region and commuting to work in another." That's as much of a 'definition' as we get to reflect the most likely fact that vast majority of commuters are to Dublin...

And here are the inputs that went into the above charts:
And the source for Dublin figures: National Accounts, regional incomes:
Notice that Dublin City's overall relative weight in the economy (ratio of share of GVA to share of population) rises relative to Greater Dublin, as expected, in line with the evident 'bedroom communities' nature of Mid-East region. Just look at the CSO figure for Mid-East share of GVA.

Economics 11/06/2010: What's going up might be also going down

Irish retail sales have surprised on the positive side, posting a 0.3% increase yoy for sales ex-motors in April 2010. Sounds impressive, especially considering this was the first yoy increase since March 2008, or over some 25 months now. But hold on to that thought of a recovery signal. Check out the charts:
Things are still very much up in the air as to whether retail sales are actually on a mend or not. The figures above plot seasonally adjusted series ex-motors. More importantly, sales in the categories that are correlated with overall household investment activities - household equipment (down 3.1% in value mom, and down 1.2% in volume mom), electrical goods (-3.2% in value mom and 2.3% in volume mom) and Furniture & Lighting (down 5% in value and 6.2% in volume) - all signal no growth in the core leading indicator of a recovery - improved domestic investment. Only Hardware, Paint & Glass category related to investment showed increases of 2% and 4.2% in value and volume in mom terms.

Interestingly, Ireland bucked the EU-wide trend in April: