22/06/11: Residential Property Index - May 2011

The CSO released their latest data for the new Residential Property Price Index (RPPI) for May 2011. Here are the highlights and updates, including forecast for 2011 (see last chart).

• Year on year May 2011 residential property prices nationally are down 12.16% with RPPI standing at 77.3 in May down from 78.2 in April. The 6mo average rate of decline is now at 1.2% per month and 12mo average rate of decline is now 1.07% monthly.
• Relative to peak prices across the nation are down 40.77%.
• 3mo MA RPPI is at 78.17 in may, down from 79.2 in April.
• RPPI is now down consecutively month on month since its peak in September 2007 with exception for August 2010 when it posted no change mom relative to July. Last time the index posted increase in yoy terms was January 2008.
  

So per chart above, the crunch is getting crunchier (note accelerated average rate of decline for 6mo relative to the average for 12mo), and mom changes are also posting acceleration downward from -1.01% in April to -1.15% in May.

Breaking down across two property types:

• RPPI for houses fell to 80.4 in May from 81.3 in April, down 1.11% mom. This marks consecutive monthly contraction since August 2010 when it rose statistically insignificant 0.11%. Relative to peak the series now down 39.1%. the 6mo average monthly rate of decline is 1.21% well ahead of 12mo average of 1.03%
• RPPI for apartments is down at 60 in may from 60.4 in April (-0.66%). Apartments prices index is down 51.57% on peak and 6mo average at -1.19% per month is signaling slower rate of decline compared to 12mo average of 1.41%

As a signal of stronger regional economy, Dublin presents a slightly divergent picture to May national level data:

• Dublin RPPI rose from 70.5 in April to 70.8 in May (+0.43%mom), marking the first monthly increase since April 2008. This increase is statistically insignificant, however. In addition, 6mo average decrease rate of 1.06% monthly is still ahead of 12mo average of 1.01%, suggesting the latest move is unlikely to be a trend-breaker to the upside.
• Dublin prices index is now 47.4% below the peak.

Now, using 5 months data for 2011 we can attempt a very crude forecast for the entire 2011, as shown in the figure below.
So far, all indications are - we are looking at another brutal year when it comes to property prices here. then, again, with zombie banks not lending and continuously hiking the cost of mortgages for existent clients, with Nama still hell-bent on derailing any sort of market bottoming-out dynamic, with all fundamentals signalling decreasing demand for property and reduced ability to pay for mortgages, it is hard to imagine the upside trend establishing in Irish property markets any time soon.

22/06/2011: DofF latest fiasco

A very revealing article in today's Irish Times - link here and a HT to Prof Brian Lucey - states that "The memo from a senior official in the department rejected the assertion from UCD economist Morgan Kelly of a possible 60 per cent fall in values over nine years. It also advised Mr Cowen, who was minister for finance at the time, that he should warn against overreacting to falling house prices. The document, drawn up by economist John McCarthy in July 2007 and sent to the former taoiseach pointed out that the housing values remained above 2006 levels."

This is another piece in a long string of evidence trickling down from the Merrion Street that points to the nature of advice and analysis conducted by the DofF. In Summer 2007 Irish property markets started showing signs of significant stress and by August we experienced the first slowdown in the rate of growth in stamp duty receipts. National average asking prices for homes, according to Daft.ie, posted seasonally unexpected decline of 0.34%mom in March, bouncing off the historic peak in February 2007. This was followed by another seasonally unexpected decline of 0.44% in April, rebound of 0.69% in May, a decline of 0.09% in June (again out of line with seasonal patterns) and a drop of 0.56% in July. The signs of some sort of sickness in the market were already visible, therefore, at the time the DofF note was issued.

Of course, DofF can be excused for not spotting the turning point in the property market - after all, virtually all data through July 2007 was at the very best inconclusive. But, the report leaves several issues worth addressing:

1. By August it was clear that the global financial markets were suffering significant pressures, which warranted some DofF attention, including on the side of the property markets;
2. What was DofF's business in advising the Minister to 'warn against overreacting to falling house prices'? Should, in an ethical society, the Minister for Finance make any calls whatsoever on private asset markets? Or should, in a functional economy, DofF job cover the need for preparing a policy response to the potentially dangerous situation developing in the major sector of the economy? In other words, was DofF doing its job advising the Minister on a PR exercise, and was it not doing its jobs in not preparing for the contingency of a property market collapse?

Of course, all of this remains academic compared to the brutish bullying stupidity of Mr Cowen's boss who famously barked in response to Prof Morgan Kelly’s articles in 2007 that: “Sitting on the sidelines, cribbing and moaning is a lost opportunity, I don’t know how people who engage in that don’t commit suicide.” (see full record here).


Oh, and just in case you might think DofF has learned any lessons from the July 2007 note debacle? Think again. Per same Irish Times report: "According to fresh analysis conducted by department economist Ronan Hickey – and published yesterday – house prices had fallen by 40 per cent from their 2006 peak by the fourth quarter of 2010." (emphasis is mine)

Err, what a wonderful revelation that is. In fact, the DofF 'analysis' is so ground-breaking that it simply confirms the data released by CSO last month - see report on that here.

But don't blame Mr Hickey for this - blame Irish Times bizarre reporting style. Mr Hickey didn't carry any 'fresh analysis' that Irish Times claims he did. instead, Mr Hickey clearly and transparently quotes from a now discontinued time series data from ESRI and ptsb index that were publicly available for ages now.

You can see this in his own paper/presentation/post available here. Just go to page 10 to see this 'fresh analysis'. Again, Mr Hickey is not doing anything wrong here, it's just the excited Irish Times failing to read his paper reporting old news and new news.

What is, however, amazing about Mr Hickey's paper/presentation/post is that this very information and the same analysis is being provided for free on a number of blogs around the country. In many cases, blogs analysis is actually way better, more data-intensive and detailed. Yet, in age of austerity, the Gov see fit to spend thousands on wages of PR-spin economists working for DofF.

21/06/2011: Bilateral trade between Ireland and Russia

As promised earlier today - the latest updates on bilateral trade between Russia and Ireland, courtesy of the latest CSO release.

Imports from Russia rose from €10.6mln in February 2011 to €15mln in March, down on €18.8mln a year ago. Exports to Russia rose from €39.5mln to €40.6mln mom in March. Q2 2011 Exports now stand at €116.5mln while imports are €39.1mln implying a trade surplus in favour of Ireland of €77.4mln for Q1 2011 - up from €15.9mln a year ago. Overall, trade surplus to Russia for Q1 2011 is now above trade balance for Brazil (€19.1mln), Canada (€68.7mln), Malaysia (€56.7mln), Mexico (€69.5mln), Singapore (€54mln), South Africa (€38.5mln), South Korea (€14.6mln) and Turkey (€57.4mln). It is worth noting that trade with China, India and Taiwan registered trade deficits against Ireland.

Few charts to illustrate (note the annualized projections based on Q1 data - not for the accuracy points, but for the directionality).

So should the performance so far through Q1 continue, this will be another record year for bilateral trade with Russia both in terms of exports from Ireland and in terms of trade surplus.

21/06/2011: Trade Data for April

Per latest CSO data released today: Ireland's seasonally adjusted

• Imports rose from €3,721m in March to €4,914.3m in April (+32%)
  
• Exports decreased from €7,717.6m to €7,530.4m (-2%)
  
• Please note, these figures cover only goods trade

Ireland's trade surplus was €2,616.1m in April 2011, down on €3,758.1m in April 2010 and down on €3,996.6m in March 2011.

January-March 2011 imports rose strongly in:

• Food & Live Animals - from €1,066.1m to €1,248.0m yoy
  
• Crude Materials, Inedible, except fuels - from €152.7m to €189.9m yoy
• Mineral fuels, lubricants and related materials - from €1,347.9m to €1,748.1m yoy
• Animal and vegetable oils, fats and waxes - from €37.7m to €57.5m yoy
• Chemical and related products - from €2,131.3m to €2,524.0m yoy
• Manufactured goods classified chiefly by material - from €802.7m to €922.0m yoy
• Machinery and transport equipment - from €3,203.7m to €3,707.0m yoy
• Miscellaneous manufactured articles - from €1,408.2m to €1,494.0m yoy

Changes in imports in mineral fuels, lubricants and related materials, as well as in chemical and related products is broadly in line with MNCs demand for inputs to deliver increases in exports. Machinery and transport equipment imports increases were characteristic of some replacement of lost (depreciated) capital base in the industry.

Exports increased by 9% to €23,346m in Q1 2011 compared to Q1 2010 with:

• Exports of Medical and pharmaceutical products increased by 18% or €1,065m
  
• Exports of Organic chemicals rose by 15% or €716m.

Exports of Electrical machinery decreased by 6% or €48m.

Lastly, terms of trade deteriorated for Irish exporters from 78.0 (price of exports ratio to price of imports) in February 2011 to 77.1 in March 2011. March reading was the lowest since January 2003 and compares unfavorably to 86.3 reading in March 2010 and 86.6 reading in March 2009.
This, of course, means reduced profit margins for Irish exporters and pressure on tax returns from external trade activities, as well as potential pressure (it will take more than a couple of months of low readings) on employment in the traded sectors. Broadly-speaking (ignoring a slight rise from 80.8 in November 2010 to 80.9 in December 2010), terms of trade have been deteriorating now for 10 months.
So as chart above shows, high exports volumes are coming in at the cost of reduced profit margins. Of course, much of this can most likely be attributed to transfer pricing by MNCs, suggesting that we might see increased emphasis on booking profits via Irish operations. This, n turn, can provide artificial support for GNP in the same way as it did in Q4 2010.

20/06/2011: Two good news from Minister Bruton

It's not all doom and gloom, folks, so when good news do arrive, or at least there is a hint at such news..., time to share. (A major HT to the fellow twitterati: @BriMcS).

The first piece comes from Minister Richard Bruton (see full release here). Let me focus on few points of interest:

"The Minister held individual meetings with 22 companies across a number of targeted sectors, including five of the top ten technology companies in the USA. The companies he met include several top internet companies with household names. The 22 companies employ a total of over 350,000 people worldwide, with combined revenues of over $230billion."

This suggests that the Minister was meeting with large MNCs, which is good. But importantly, he also met with "several rapidly growing “new technology” companies which are characteristic of the new Silicon Valley boom". This suggests that the Minister has met with some younger and faster growing internet companies, especially companies past the first/second round of fundrasing and only starting their operations outside the US. The domain of such companies is a new territory for IDA and they represent hige untapped potential for Irish market.

Also encouraging is the fact that the Minister also met a number of "companies in international services, entertainment and aviation" - areas outside the traditional focus on ICT and life sciences.

Also crucially, the Minister explicitly recognized one of the core problems faced by Irish companies and MNCs in the ICT sector today - the problem of skills shortages. "... it is estimated that there are currently approximately 3,500 vacancies in the ICT sector in Ireland. The Minister for Education and Skills has recently announced over 2,000 one-year ICT training places as part of the Springboard programme from this September. However we must also go beyond immediate needs, and I together with Minister Quinn will shortly start an ambitious process of examining measures we can take to respond to the future requirements of the ICT sector."

I recently spoke at the Irish Internet Association annual conference where the issue of specialist skills shortages in ICT and the lack of incentives for entrepreneurs in the sector were raised repeatedly. It is clear from my sources that:

1. We are currently experiencing net outflow of high end skills in ICT due to absolutely regressive, skills- and entrepreneurship-penalizing changes in personal income taxation in the Budgets 2010 and 2011. In particular, high upper marginal tax rate and absurd USC rates and penalty for self-employed workers and entrepreneurs are having dramatic effect of pushing the younger and most skilled high-end ICT specialists out of the country.
2. Skills base of indigenous workforce in the area of high-end ICT specialists cannot be improved significantly within reasonable time frame (less than 4-5 years) as such skills require a combination of education (beyond 3rd level) plus on-the-job training.

Another excellent change comes also courtesy of Minister Bruton (details here). Minister Bruton will legislation facilitate formation of co-operative societies to further facilitate formation of new enterprises. The move is aligned with the publication of the new Companies Bill and is designed to reduce red tape (which, is welcome, but incidentally, is not as important to the entrepreneurs and companies operating in Ireland, despite FG's excessive focus on 'red tape'). But the value of the new changes to co-operative societies regulations is of great value in itself.

Co-operative ownership represents one of the oldest forms of alternative enterprises and having more streamlined, easier regulatory environment for co-ops can be a net positive for entrepreneurship. Co-operative ownership is also rather efficient in the conditions of constrained credit availability for SMEs because it allows for better anchoring of household savings into investment.

Here's some interesting literature on co-operatives:
Link 1: The study of co-operatives in modern economics: a methodological essay
Link 2: A study into co-operative enterprise for instrumenting and marketing auctions in agricultural produce and a related later study which is even broader here.
Link 3: An interesting study on co-operative's reforms in Italy (where co-operative ownership stretches from traditional agricultural and tourism sectors to banking and distribution)
Link 4: Another study from Italy focusing on the future of financial co-operatives in relation to post-crisis financial services recovery
Link 5: An excellent discourse on the issue of co-operative firms role in bridging the gap between social and market objectives, containing some best practice in regulatory frameworks to support co-operative efficiencies (which might be of help to Minister Bruton as well).

20/06/2011: Europe's Corporate Tax Rates

The Institute for International and European Affairs provided a comprehensive list of EU member states' effective corporate tax rates - here - with a handy graphic depicting various states as either highest or lowest in terms of their corporate tax rates in a continuous color coded scheme.

Statistically-speaking, the cool graphic is slightly the case of 'more design, than substance' as it does not provide analysis for what constitutes a 'high' or 'low' rate. Below, I provide a chart based on IIEA's data with specified boundaries for cut-offs for the tax rate categories. These bands are based on the +/- 1/2 of STDEV and +/- 1 STDEV from the mean. Please note that the parameters are:

• Mean (EU-wide less Malta) = 12.55%
• Mean (Euro area) = 13.88%
• Median (EU-wide) = 12.55%
• STDEV = 6.40

For the sake of an argument: Ireland is just below the EU average and is firmly in the 'Average' tax rates category. France and Denmark are firmly in the 'Low' tax rates category and Belgium and Lux are in 'Very Low' category. Ireland's 'neighborhood' in terms of plain statistics, includes: Austria, Portugal, Greece and Cyprus.

So, statistically, Irish effective corporate tax rate is indistinguishable from EU Average and from Euro Area Average. I'd say: "Bugger-off, Sarko!"

18/06/2011: Research & Teaching Nexus

These are my old slides from a presentation given back in 2006 on the issue of linkages between research and teaching in 3rd level education. Keep in mind - they refer to courses I taught before joining the School of Business at TCD, back in the days when I was in the Department of Economics.

You can magnify individual slides by double-clicking on the picture

18/06/2011: Two papers - Commodities Speculation and Flat Taxes

Some interesting studies worth reading released in recent weeks.

First: Lombardi, Marco J. and Van Robays, Ine, paper "Do Financial Investors Destabilize the Oil Price?" (May 20, 2011). ECB Working Paper No. 1346. Available at SSRN: http://ssrn.com/abstract=1847503

The study results "suggest that …financial activity in the futures market can signi…ficantly affect oil prices in the spot market, although only in the short run. The destabilizing …financial shock only explains about 10 percent of the total variability in oil prices, and shocks to fundamentals are clearly more important over our sample.

Indeed, looking at speci…fic in the second half of 2008 can be mainly explained by a substantial fallback in economic points in time, the gradual run-up in oil prices between 2002 and the summer of 2008 was mainly driven by a series of stronger-than-expected oil demand shocks on the back of booming economic activity, in combination with an increasingly tight oil supply from mid 2004 on. Strong demand-side growth together with stagnating supply were also the main driving factors behind the surge in oil prices in 2007-mid 2008, and the drop in oil prices activity following the …nancial crisis and the associated decline in global oil demand. Since the beginning of 2009, rising oil demand on the back of a recovering global economy also drove most of the recovery in oil prices.

However, we …find that …financial investors did cause oil prices to signifi…cantly diverge from the level justi…ed by oil supply and demand at speci…c points in time. In general, inefficient …financial activity in the futures market pushed oil prices about 15 percent above the level justi…fied by (current and expected) oil fundamentals over the period 2000-mid 2008, when the volume of crude oil derivatives traded on NYMEX quintupled. Particularly in 2007-2008, destabilizing fi…nancial shocks aggravated the volatility present in the oil market and caused oil prices to respectively over- and undershoot their fundamental values by signi…ficant amounts, although oil fundamentals clearly remain more important."

Note - emphasis above and below is my own.


Another interesting study I came across is the Blumkin, Tomer, Sadka, Efraim and Shem-Tov, Yotam, paper "Labor Migration and the Case for Flat Tax" (May 31, 2011). CESifo Working Paper Series No. 3471. Available at SSRN: http://ssrn.com/abstract=1855947

The study examines the case for a flat tax in the presence of migration threats - in other words, in the case of open labour markets. The study considers a tax competition game between two identical countries populated with individuals with two skill-levels.

"We compare between a non-linear tax regime and a flat tax system and demonstrate that in the backdrop of a high-skill migration threat (due to a reduction of the migration costs faced by high-skill individuals), the re-distributive advantage of a non-linear system over a linear (flat) one is significantly mitigated." In other words, when high skills workers are mobile across borders (as in the case of advanced economies, and especially small open economies like Ireland), progressive taxation's main benefit over flat taxes (its actual redistributive 'progressivity') is reduced significantly.

"In the presence of migration, and in sharp contrast to the autarky case, a coordinated shift to a flat system (with its entailed administrative advantages), still allowing for fiscal competition between countries (by maintaining the countries' sovereignty over the welfare state generosity), is not too welfare-reducing; and when administrative costs are taken into account, such a shift may prove to be mutually beneficial for both countries."

"... taking into account the administrative gains associated with a flat system (relative to a non-linear tax regime), even when both countries may choose a general non-linear tax regime, an equilibrium where both do set a flat system in place is likely to form." So for two systems starting from a non-flat progressive taxes base, open labour policies will lead to a flattening of the tax systems.

The authors "...also confirm the race-to the-bottom hypothesis that suggests that migration reduces the extent of redistribution." This point should be salient for Ireland. As we all know, Ireland is currently experiencing very substantial outflow of skills, especially at the higher (internationally marketable) segment of skills distribution. This means that this trend alone will tend to lead to a reduction in the redistributive effectiveness of the existent taxation system progressivity. Thus, there may be serious grounds to consider flatter (not more progressive) taxes as the means to actually mitigate the effects of lost progressivity. Some food for thought.

17/06/2011: Further proof that WE NEED a public sector reform

Occasionally, from time to time, ok... rarely, but... this blog does post some satirical images. The following are the screen grabs from the official e-tendering site for Iris Public Sector (the link is here) - hat tip to two twitterati: @Wexford_tweeter and @aidanclince.
To see what this is about - read the project title in the section magnified below:
Priceless!

17/06/2011: Irish Exchequer Expenditure - May

A late catching up on the recent Exchequer figures for May. In the earlier post (here) I covered receipts side of the figures. Now, time to update the expenditure side as well. I was reluctant to write much about expenditure and revenue sides of the fiscal crisis in previous months, since early months show very little in terms of comparatives. By the end of May, however, almost 1.2 a year has gone by and some trends can be established, albeit of course with caution.

Total net spending by the Government for January-May 2011 was €18.364bn up on €17.867bn for the same period in 2010. Overall, spending fell 3.67% on the same period for 2008 (€699.5mln saved) but is up 2.78% on 2010 (dis-savings of €497.3mln).

This is not encouraging.
As chart above shows, the expenditure is now running between 2010 and 2008 levels. Sounds ok? Not really. Ireland will have to cut another ca 6% (based on rather rosy plans set out by the Troika back in November) in years to come. So far, we only managed to cut 3.67% relative to 2008 after three ‘savage cuts’ budgets.

The reason is that our 'cuts' were not really that deep, per se, but that they were transfers of expenditure from the capital side and some departmental current spending to Social Protection and Education & Skills. Here are two charts:


Here are some relative slippages (bear in mind that departments responsibilities and names have changed since 2008):
Social Protection spending rose 47.33% over the same period.

These were offset by above average (simple average of -20.69% decline across all departments) declines in spending levels in:

• Tourism, Culture and Sport – down 49.58%;
• Community, Equality & Gaeltacht – down 48.77%;
• Enterprise, Trade & Innovation – down 45.58%
• Environment, Community & Local Government – down 52.24%
• Foreign Affairs – down 28.93%
• Transport, Tourism and Sport – down 56.56%
  

Below average declines took place in:

• Agriculture, Fisheries and Food department spending declined 7.49% in January-May 2011 compared to the same period of 2008;
• Comms, Energy and Nat Resources – down 13.34%;
• Defence – down 15.69%;
• Education & Skills – down just 2.52%;
• Finance – down 17.925;
• Health & Children – down 1.75;
  

• Justice & Equality – down 15.525;
• Taoiseach’s – down 1.75%

Large fraction of these reductions is explained by the capital cuts (a subject for my future post) and by the timing of expenditure (we do not know if payments lags are rising in the public sector or not, and we do not know if capital spending is being delayed to generate positive news momentum).

But it is worth noting that some of the departments show deterioration in performance on the expenditure side relative to 2009-2010 (as opposed to 2008) base. Again, some of these are due to re-arranging of the departmental responsibilities, but in the end, what matters is that to-date, through the first 5 months of the year, Irish Exchequer expenditure cuts and tax increases have yielded just €699.5mln in savings on the 2008 levels.

Furthermore, we should note that promissory notes paid out to the banks in March are not factored into the overall voted expenditure, so the comparatives on the spending side are clearly showing that fiscal consolidation is not working so far. Which brings us to the following ‘rumour’ I heard from a senior governing coalition member. Allegedly, all indications are, Budget 2012 will be, to quote my source, “so bad, it’ll push thousands currently at the margin of leaving the country into booking their tickets out of Ireland this side of June 2012”. And this was in relation to the tax burden measures.

So lastly, lets take a look at year-on-year savings generated by all the austerity measures. The chart below shows that:

1. Savings generated earlier in the year in 2010 were driven primarily by the delays in payments and other temporary measures. Having started at a robust saving of 12.95% in January 2010, the Ex chequer allowed slippage of cuts to net a miserably low rate of overall expenditure reductions of just 1.55% for the year.
2. Both, in 2009 and 2010, by May, Exchequer spending was either contracting of rising at a much slower pace year on year.
3. The pattern for expenditure this time around – in 2011 – is strikingly different from that in either 2010 or 2009.
   

17/06/2011: Who's Confidence is it, folks?

Here are few charts to illustrate the fact that some 3 years into the 'Restoring Confidence' strategy of the successive Irish Governments... and things are not exactly working out.

First straight up, the markets 'voting' on Irish banks:
Looks like investors are not really in tune with Irish Government plans for 'repairing' our banking system despite unprecedented guarantees from the Sovereign which have:

• Explicitly underwritten virtually all deposits and most of the bonds held or issued by the IRL6;
• Implicitly underwritten virtually any extent of losses in the IRL6;
• Explicitly purchased some of the worst 'assets' held by the IRL6; and
• Explicitly underwritten all of the IRL6 funding through ECB and CBofI lending facilities

And what about the entire system of domestic financial institutions? Well, the story is pretty much the same:Recall, thus that at the present (and the picture remains stable in this context since around late 2008):

• Financial investors have no confidence in IRL6 (as these charts illustrate)
  
• Fellow peer banks around the world have no confidence in IRL6 (as clearly indicated by the fact that other banks are not willing to lend to IRL6)
• Bond markets have no confidence in IRL6 (since none of IRL6 can issue any debt paper)
• The ECB has no confidence in IRL6 as it desperately tries to shed their borrowings off its balance sheet (including by shifting it onto CBofI balancesheet)
• Private sector have no confidence in IRL6 as they have taken out some €24 billion worth of funds from IRL6 (per April 2011 data from CBofI) or 23% relative to peak
  

So the only ones still showing confidence in IRL6 is... Irish Government itself, with the Sovereing - itself severely strapped for cash - putting some €18.566 billion worth of taxpayers money into Irish banks deposits since April 2010. That's a whooping ca 8-fold increase in Confidence, then.

15/06/2011: Few points of the future of FS

This is the presentation I gave at the Roundtable (thanks to all 150+ academic & industry practitioners who came and engaged) on the Future of Financial Services at the Infinity 2011 Conference on International Finance. Slides and few points:
Since I was chairing the event, I had to limit severely my presentation and the core of the event was based on 3 presentations by industry experts and the discussion with the audience - less Q&A, more open discussion.
Consistent with my view, the global financial crisis continues to threaten macroeconomic stability of the global financial and economic systems.

• The core component of the crisis - the crisis across global financial markets has abated due to the efforts of the Central Banks and Governments around the world. But it has not gone away. The system overall remains fragile on the side of liquidity (with quantitative easing rounds now being scaled back and no liquidity traps remaining, holding liquidity already supplied in the system locked away from the process of real lending).
• The crisis continues largely unabated in the sub-geographies of advanced economies and in particular within the banking sector in Europe, Japan and to a much lesser extent - the US. In the US, where balancesheet repairs on the capital side took stronger forms, the crisis in now manifested on the demand side for lending as well as in continued stagnation in the core household asset markets (property in particular).
• The main focus of the crisis has shifted onto debt - with deleveraging of balance sheets being secondary to the need to continue deleveraging households - something that continues to evade the focus of the policymakers.
• A number of large economies are now also experiencing a full-blown or forthcoming sovereign debt crises.

Overall, the duration, the breadth and the depth of the current crisis are so profound that in my view they signal a structural nature of the crisis, leading to a permanent (or long run) shift in:

• Regulatory environments (tightening of regulatory and supervisory systems, higher demand for capital, higher demand for quality capital, etc) all of which, unfortunately, so far, represent no qualitative departure from the already failed model of regulation that led to the current crisis in the first place. In other words, there's 'more of the same' type of a response on the regulatory side that is emerging so far, which does not hold any real promise of change, but suggest dramatic increases in the cost of capital provision, especially via debt instruments.
• The process of re-banking advanced economies - yet to start - will be taking Europe, North America and other advanced economies to a New Normal which will require cardinal rebalancing of the markets for financial services provision. This, in my opinion, will see consolidation of global banking institutions and a decline in their combined market shares, and the emergence of highly competitive and innovative specialization-driven service providers. The latter will be drawing increasingly greater shares of the markets for FS globally and will be largely free from the legacy of the crisis. In this context, the legacy of the crisis that will remain with the sector is the legacy of massive destruction of wealth inflicted onto the clients by the minimal compliance (prudential or suitability tests-based standards) ethos of the pre-crisis investment and wealth management services providers. In their place, the new providers will be adopting (driven by market demand, not regulatory systems) a fiduciary principle-based services ethos, which will put client needs as the main driver of revenues for the sector. Up-selling complexity and risk is out as a business strategy for margins support. Client relationship-building and product-backed client support will emerge as the core replacement strategy.
  
• In terms of re-equilibrating demand and supply of credit, the problem of shrinking pool of savings (due to fiscal austerity-driven tax increases, and demographic aging in the West contrasted with consumption expansion in the New Advanced Economies - NAE) will have to alleviated through new instruments. Debt will remain constrained as long-term process of deleveraging unfolds, equity will be the king, but hybrid instruments (on corporate finance side, less so onr etail side) and some new instruments for investment will have to emerge.
  
• Lastly, the New Normal will be characterized by a drastic scaling back of real off-balancesheet public liabilities (pensions, health and social welfare nets). The age of reduced local (within advanced economies) savings, falling debt levels and tighter global supply of savings (consumption effects in the emerging and NAE economies) will result in reduced ability to finance sustained deficits. This will precipitate emergence of new financing mechanisms (more closely aligned pay and benefits) for public investment, further reducing private investment supply.

The New Normal is already emerging via the divergence of financial services environments across two geographies: the Advance Economies (the "North") and the NAE economies (the "South").
In addition to regulatory pressures of 'Do More of the Same' approach in the advanced economies, and on top of a persistent gap in growth between the advanced economies and NAEs regions, there are emerging gaps in Investment volumes heavily skewed in favor of NAEs, a margin gap and a capital gap (both in terms of quantity and quality of capital, with many NAE banking systems explicitly or implicitly underwritten by solvent and liquid SWFs).

This geographic bifurcation of the FS models will fully emerge, in my view, around 2015-2020 and by 2020-2025 we are likely to see the drive toward convergence of FS across two geographies:
This convergence will be driven, in addition to the above factors, by the rising pressure of competition with 'North' service providers pushing into NAEs to capture higher margins and new markets, and with 'South' service providers pushing aggressively into the advanced economies markets to capture know-how, exercise competitive advantage of relatively cheaper capital available in the 'South' and retaliate against 'North's' competitive drive into their own markets. The end result will be globally lower Returns to Equity (ROE) squeezed on both sides by higher capital requirements and compliance and risk management costs (E-up) and lower margins (R-down) due to lower availability of savings, regulatory costs increases outside capital costs alone and a long-term shift of demand away from high risk high margin products (the shift toward fiduciary standards). Overall risk (sigma) will abate, as global economy settles on a lower structural growth level, further reducing risk premia-driven margin and ability to upsell risk.

In this process of transition to the New Normal, it is, IMO, of interest to have expanded academic and practitioner debate and research relating to the following questions: