Did Financial Reporting
worsen the crisis?
The political economy of media in the economy
Presentation by Marc Coleman to Dublin Economic Workship, October 2014
Newstalk presenter, Sunday Independent Columnist, bestselling author
Formerly: ECB economist
Irish Times Economics Editor
Department of Finance Economist
A 4 Step approach:
Part I:
Political Economy and Political cycles
Part II:
Countercyclical comment
Part III:
Pro-cyclical comment
Part IV:
Who really got it right?
But first ……
…..a 3 part quiz……
Question 1
Who in a 2003 radio interview with Eamonn Dunphy suggested that
Sean Fitzpatrick should be made Governor of the Central Bank of Ireland
and wrote on March 28th 2004:
Michael Fingleton’s Irish Nationwide published a cracking set of figures …I have alrady made a
muggins of myself. I bought bank of Ireland stock a few months ago at just above these levels..But
I could have done better. I should have bought into Nationwide
Far from denouncing this as stoking a property boom that was in full
swing Julien Mercille’s book actually praises (?!?) this person (p 23) for
exposing “the power of advertisers in influencing news content”
By the way the following year I terminated Bank of Ireland chief Economist Dan McLaughlin’s
column in the Business Supplement of the Irish Times: I felt the property market was
overheating and didn’t want mixed signals
Question 2
Who wrote on September 28th 2008:
The only option is to guarantee 100 per cent of all depositors/creditors in the Irish
banking system. This guarantee does not extend to shareholders who will have to
live with the losses they have suffered. However it applies to everyone else”
He added in his book “Follow the money” that he persuaded Brian Lenihan to go
for the guarantee scheme as follows:
“I argued because the Irish banks' funding had become so unstable, if we didn't
guarantee the funding as well as the deposits, the banks would come crashing
down…this was economic policy-making formulated in a kitchen and made up on
the spot”
Julien Mercille’s book fails to mention this call, which some
believe was instrumental in a bail out that cost us €31 billion
Question 3
Who wrote in December 2005 that the housing market would grow
“at a modest but still significant pace”
and called for
“more scope for increased mortgage lending by financial institutions by means of
subprime mortgages, 100 per cent mortgages and equity release loans”
This person was not, in fairness, responsible for either sub-prime
mortgages and was well meaning in their comment. Still, Julien
Mercille’s book should have balanced it’s praise for this economist (p
102) with the quote above
By the way in this year I stridently warned – in an interview with then Central Bank
Governor - about the threat that equity release loans posed to the economy and called
for data to be compiled on their extent
Political Economy and political cycles
3 numbers
But what do they mean?
Scaled proportionate to their size
31 billion
96 billion
324
billion
Now back to those numbers
31 billion
IBRC debt taken into national
debt in April 2013: Cost of Crisis
96 billion
IFAC estimate of public sector
pension liability
324 billion
IFAC estimate of social welfare
contingent liabilities due to cost
of universal welfare payments
between a quarter and a third more
generous than UK
So who were the real beneficiaries of
the boom?
Julien Mercille:
Or
• Bank bondholders
• Public sector pensions
(including University
pension liabilities bailed
out to tune of €2 billion)
• Estate agents
• Media advertisers
• Clientelist Welfare
system
Why didn’t Unions/Academics
stop the boom?
By 2006 housing activity
accounted for:
- (at least) one fifth of all
tax revenues
- Half of all revenue
growth
- Majority of local gov’t
financing via builders
levies
…. So basically the answer
to the question above is
that …
THE HOUSING BOOM
PAID FOR THE MOST
GENEROUS SYSTEM OF
PUBLIC PAY IN EURO ZONE
Why didn’t “the left” stop the boom
2007:
- Labour party’s main
complaint was that
gov’t wasn’t spending
enough
As cited on page 150 in
“Fall of the Celtic Tiger” I
tried to warn about
excessively optimistic
forecasts:
April 17th Irish Times
- Lab/FG forecast 4%
growth p.a. 2008-2012
“Brave assumptions on
Growth may not add up”
Truth is….
Buchanan & Tullock:
If sufficiently organised 26% of
voters can control election by
- Logrolling
- Trading votes
….provided (Franzese
- politicians are weak
- electoral systems are very
sensitive
- Parties are fractured
Tabellini:
• Public debt destined to increase
Buchanan & Wagner:
• Insiders exploit voter’s lack of
knowledge about budget
constraint
Percentage of vote
90
80
70
60
1969 1973 1977 1981 1982 1982 1987 1989 1992 1997 2002
Percentage of eligible voters
casting a ballot
Voter turnout
Combined vote of 2 main political
parties
78
76
74
72
70
68
66
64
62
60
1969 1973 1977 1981 1982 1982 1987 1989 1992 1997 2002
Year of Election
Rate of increase in governemnt spending
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2000
2001
2002
election
2003
2004
2005
2006
2007
election
The politics of Political economy
• 2004: Bad election result for FF. Good for SF
• Blind panic in FF
• Result: Inchidoney conference, Fr. Sean Healey
• Bertie Ahern converts to socialism
• And this is what happens next:
2004-2009
In just 5 years …
..vested interests push up government spending
by 55%
A Neo-Liberal
paradigm?
Ireland ?!?
The facts about Irish
“Neo-liberal economic paradigm”
• CSO: Public pay 47%
above private pay
• ESRI, ECB, EU
Commission: Controlling
for age & qualifications
gap still highest in EU
• Nearly half GNP in state
hands
• Current spending one
quarter above 2004 levels
• Health spending 8.7% GNI
well over EU average
• Unions consulted weekly,
monthly
• Taxpayers consulted only
every 5 years
• RTE state run, huge
influence of left and hard
left
• IFUT Gen Sec former
Marxist who supported
military dictatorship.
Health being a case in point:
• Highest medical pay in Euro zone
• Nearly double number of nurses per head compared to
France
•
•
•
•
1 hospital per 92,000
In Britain and Netherlands 1 hospital per 200,000
Public sector power … not patient interest
€13 billion spend 4 times 1994 level…well above what
inflation and population growth would justify.
Health spending a case in point:
Staggering rise between 2004-2014
% change
between 2004
and 2014
Health vote spending (€ billions)
16
Health vote
+68%
Consumer Prices
+18%
Population
+16%
14
12
10
8
6
4
2
0
2004
2014
Ideology of statistics
• Why GNI and not GDP?
– GDP counts low tax FDI
activity
– Overstates ability to
generate tax
– Fine for long-term debt
servicing capacity (capital
measurement)
– Wrong for shortterm/current spending
capacity measurment
• EU Commission May
2014
– EU average
7.1% GNI
– Ireland
8.7% GNI
THE REAL POLITICAL ECONOMY STORY:
2004-2009
Current spending up 55%
2009-2014
Current spending down
just 5.5%
%
change
98-08
Pub Sector
(excluding health)
Computing, Research
Development
2009-2014
Tax burden on average
family rises 30%
Taxpayer sacrificed to
defend state spending
Business Services
Consumer Price Index
(Dec 2001=100)
70.9
55.0
58.4
44.8
NOW THOSE THREE NUMBERS:
€31 bn
=
Cost of Banking crisis
€96 bn =
Cost of public pension
liability
€324 bn=
cost of social
welfare liability
Counter Cyclical policy & comment
Simple question:
Your grandmother – whom you repeatedly
warned to stop smoking – faces a crucial
operation on her lung.
She has a 50/50 chance of survival
On visiting her the night before do you:
A. Remind her how many
times you warned her not
to smoke and warn her
that she has a 50% chance
of dying because she
ignored your advice
B. Focus her attention on
the 50% chance she will
pull through
I WROTE THIS
ARTICLE IN 6th
JULY 2006:
BRIAN
COWEN
RESPONED
ON JULY
13TH 2006:
Also in that vein..
Warnings of crisis (Marc Coleman) 2004
• October 2004 (DEW conference): Paper
(published as Coleman (2005), ESRI QEC) warning
that the Stability Pact had been eroded, leading
to a deterioration in Europe’s financial stability
• October 2004 Magill:
In an article I warned Bertie Ahern’s conversion to
“socialism” foreshadowed a rampant rise in state
spending (which subsequently rose 31% in 3 years)
Warnings of crisis (Marc Coleman) 2005
• September 2005 As Irish Times Economics Editor Marc Coleman
ceased taking regular articles from economists working for financial
institutions.
• 2005 Sept (Irish Times) Marc Coleman carried ECB President Jean
Claude Trichet warnings on Irish economy overheating
http://www.marccoleman.ie/wp-content/uploads/2014/10/Trichet.pdf
• 2005 Nov 5th (Irish Times) Marc Coleman warned debt was turning
the Celtic Tiger to a Celtic Garfield
http://www.marccoleman.ie/wp-content/uploads/2014/10/OverfedCeltic-Tiger-becomes-cartoon-cat.pdf
• 2005 September I ceased practice of taking regular opinion columns
from financial market economists as I felt this compromised Irish
Times need to warn about a possible crash
Warnings of crisis (Marc Coleman) 2006
• March 31st 2006 (Irish Times) Marc Coleman warned financial
regulation had collapsed in an article beginning “Stop the Economy I
want to get off” and ending with the words “Nobody, absolutely
nobody, is in control”. (see www.irish-times.ie archive 31/3/2006 for
article)
• 2006 July 17th
Marc Coleman confronted Brian Cowen in
Galway Bay hotel (at a Fianna Fail economics conference) and
challenged him to prepare for recession
• 2006 Sep 13 (Irish Times) Marc Coleman warned construction sector
could crumble, taking down economy with it: “What if construction as
our cornerstone crumbles…?”
http://www.marccoleman.ie/wp-content/uploads/2014/10/What-ifconstruction-as-our-cornerstone-crumbles_0951.pdf
Warnings of crisis (Marc Coleman) 2007
• 2007 Mar 25 (Irish Times) Marc Coleman warned that Ireland had
becoming Europe’s most indebted economy
http://www.marccoleman.ie/wp-content/uploads/2014/10/Ireland-topsdebt-league.pdf
• 2007 Apr 17 (Irish Times) Marc Coleman warned that political party
election forecasts and spending plans were too optimistic by far. Marc
Coleman was praised for this in the recent book “The Fall of the Celtic
Tiger” by Donal O’Donovan and Professor Antoin Murphy.
“Fianna Fáil’s economic policy is based on confident predictions
but is it realistic?...”
http://www.marccoleman.ie/wp-content/uploads/2014/10/Braveassumptions-on-growth-may-not-add-up-.pdf
Question: Why are none of these
referred to in Julien Mercille’s book?
Could it perhaps be because I have…..
- challenged the ‘progressive’ value system (high taxes
and spending) which is book – and those who praise it –
promotes?
- challenged Universities over their increasing
politicisation and cost to the taxpayer?
- called for transparency re taxpayer bail out of €2 billion
University pension fund?
If none of the above, then why?
Let’s look at what is in Mercille’s book
• Criticism of “The Best is Yet to Come”
• Selective quotes from Sunday Independent
• Lots of attacks on “Neoliberalism”
Read books before you cite them:
The Best is Yet to Come about 2020 not 2010
It’s warnings re 2010-2016 period were clear
(p 41): “borrowers…are robbing their old age to pay for inflated house prices”
(p 41): “From already high rates, private sector credit rocketed…just when they
needed to grow at a settled rate…house prices jumped up”
(p 42): “If they were 15 per cent overvalued in the autumn of 2005 they were
around 25 per cent overvalued by 2007”
(p 42): “Some 140,000 stand to lose their jobs [in construction]”
(p 42): “By 2006 over half of [revenue] growth – essential to finance rapid
increases in government spending – was dependant on either the property
market or the construction industry”
There are many many more quotes in that vein concerning predictions for ensuing
decade ie 2007-2016
So why did I write a book with that
title?
Average growth: 1997 to 2014
Ireland:
Euro area
5.0
4.0
3.0
2.0
1.0
0.0
Source: OECD Economic Outlook, June 2013
OECD
Ireland is on a long term
path of demographic
recovery which this
recession has interrupted
but which now looks set to
continue
IRELAND AND ENGLAND: POPULATION'S
COMPARED
Ireland
England
40
30
20
10
2006
0
1841
Millions of people
50
What if Ireland was as densely populatedRepublic
as…?
EU & Irish population growth 2004-2014
(2004=100)
116
Ireland
EU
Island
25.0
20.0
114
112
Millions of people
15.0
110
108
10.0
106
104
5.0
102
100
Germany
Switz.
Denmark
Poland
France
Austria
Ireland 1841
Source: CSO Population estimates, August 2014
0.0
Ireland 2006
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Really disappointing:
•
•
J Mercille a lecturer in Geography, Environment & Planning.
Should have noticed mine was first book to:
• - Slam successive governments for failing to plan spatially
(chapter 2 “Stunted nation” on “Leinsterisation of Ireland”)
•
- Advocate a sensible urban strategy of properly densified cities to make more
efficient use of land and avoid property price pressures
(chapter 3 “Density Dividend”)
•
Called for higher skylines (within moderation i.e. Berlin not Boston) to make
property in city centres more affordable for young people
(chapter 7 “The Only way is up”
•
Called for implementation of Kenny report, for land price control and proper
structures for local government planning
(Chapter 10 “The Legacy of Land”
Also in The Best is Yet to Come
Vision for recovery I
Vision for recovery II
Predicted half a million
population growth this decade
Said in 2007 that an Asia strategy
could lead Ireland to prosperity
Already up 300,000 since book
written (2007)
2009-2013:
Export demand grew by between
39% (Pakistan) and 94% (China)
(UNCTAD)
2014-2019:
Export demand to grow by 58.5%
(IMF)
And as for “Neoliberalism”:
Chapter 14 of first book slammed Ireland’s class ridden secondary education system as a
bastion of privilege and unfair and unequal division in access to opportunity
Chapter 2 of “Back from the Brink” (2009) (chapter title was “Lax Americana” highlighted
Republican John McCain’s role in the Arizona banking crisis of 1984 and subsequent
unfitness for office
Chapter 11 called for a complete overhaul of financial regulation and a shift from Anglo
Saxon to more continental style models of financial control
Chapter 12 praised Barack Obama’s as a new departure in US politics from GWB failed
administration
But it also points out that:
1. Democrats were prime movers in sub-prime crisis (which most Republicans opposed)
2. Democrat controlled Senate with Obama support has since 2006 doubled US debt
adding more debt in 8 years than all Presidents since George Washington up to 2006
Julien Mercille thinks this is “not large enough to make up for lost demand in the economy”
(p 180)
!?!?
Pro Cyclical policy & comment
Countercyclical comment needs to be
…..well…..
Kinda countercyclical
i.e.
Countercylical in bad times as well
as good times
Kepplinger, Hans Mathias (2000). The
Declining Image of the German
Political Elite. In: The Harvard
International Journal of Press/Politics,
5(4) 71-80
Gorz, Marcel (2014) Good news and
bad news; evidence of media bias in
unemployment reporting. In: Public
Choice, Springer Science and Business
Media.
Dobelli, Rolf (2013) The Art of thinking
clearly: Better thinking, Better
Decisions, Sceptre
Johnston, Wendy & Davey, Graham
The psychological impact of negative
TV news bulletins: The catastrophizing
of personal worries
Nyberg report (2010): Groupthink was
key cause of crisis
“Bad news has
travelled around
the world before
good news has
even
put its
boots
on”
Did
I
really
say
That
?
Quotes and context
“Economy and
house prices will
rock & roll into
next century”
Key word is “Century”. Period of 100 years
Already by 2014
- Property Prices have risen 25%
- Commercial prices up 31%
This is against backdrop of
- mortgage drawdowns at lowest level since
1972
- negative credit growth
- (well capitalised) banks not lending
- activity so low ESRI/KBC suspended
regular property price index for three years
Once stress tests completed
- Prices will return, as I have consistently
predicted to 2003-2005 range depending on
: Rate of construction activity
: Central Bank regulation of market
I STAND BY THIS PREDICTION
Quotes and context
“Economy struggling in the grip of
doomsayers” (March 2011)
I criticised predictions of falls in property prices in March 2011
I criticised “excessively restrictive and counterproductive” regulation
I warned negative comment was forming a “self-fulfilling vicious circle”
I called for govt to “urgently establish and cogently communicate an
integrated policy on housing, property, Nama and banking”
Key quote
“If banks are properly capitalised, if government fiscal
policy starts curbing waste instead of raising taxes and if
commentators do nothing to undermine confidence then
a stabilisation of house prices at or close to 2004 levels
can be sustainable
“If banks are properly capitalised”
•
H1 results AIB, BoI Core Tier Capital one ratios 16% +
•
ECB stress tests to conclude this month giving all clear
“If fiscal policy starts curbing waste instead of raising taxes”
• 2015 Budget begins process of reversing tax rises
“If commentators do nothing to undermine confidence”
• Up/Down groupthink in boom/bust replaced by balanced comment
1 May 2012: Central Bank research proves me right
http://www.centralbank.ie/publications/Documents/HP_Let5.pdf
6 Oct 2014: Housing market proves me right
http://www.independent.ie/business/personal-finance/propertymortgages/dublin-house-prices-rise-by-a-third-in-12-months30640720.html
Morgan Kelly’s predictions of national collapse
QEC ESRI (2007) “a likely scenario is for the selling price to fall by around 5% p.a. each year for the next decade”
Wrong:
House prices fell sharply and dysfunctionally in 2008-2010
Market disappeared in 2011-2012
Prices are up 24% since trough for residential property (CSO, Myhome, Property Price Register)
Prices are up 31% since trough
Morgan Kelly 2010, 2011 Irish Times
-
GDP to collapse by 20 per cent
-
Unemployment to reach 20 per cent
-
Debt to top €250 billion
-
Ireland to see emergence of “a hard right anti-Europe anti-Traveller party “
IRISH ECONOMY
Oscar Wilde
“Reports of my death are greatly
exaggerated”
Whoops. No Apocalypse.
Property market recovery
(index 2005=100)
Unemployment rate
16
15
14
13
12
11
10
9
8
115
National
Non Dublin
Dublin
85
2011M12
2012M04
2012M08
2012M12
2013M04
2013M08
2013M12
2014M04
2014M08
80
75
EU & Irish population growth
(Index: 2004=100)
65
70
Irela…
60
110
55
105
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul
11 11 11 11 12 12 12 12 13 13 13 13 14 14 14
100
2004 2006 2008 2010 2012 2014
Back in Black (nearly)
2014
2015
2016
GDP
4.7
3.9
3.4
GNP
4.1
3.6
3.1
Deficit (% GDP)
3.7
2.7
1.8
January to September
(% change on previous year)
Debt/GDP ratio
115
10
110
5
105
0
100
-5
95
-10
90
-15
-20
85
2014
2015
2016
2017
2018
2008
2009
2010
2011
2012
2013
2014
Something is collapsing all
right….
….but it is not Ireland’s future as so
many economists forecasted
…so what is collapsing?
UCD rankings are collapsing….
UCD rankings according to T.H.E.*
2008
2010
2012
2014
0
50
100
150
200
Philip Baty, ratings editor of Times Higher
Education supplement
“UCD has plummeted out of
the top 200 altogether”
250
David Beckham – v – Miroslav Klose
1 scores big contracts with advertisers & loses world cups
Other scores goals & wins world cups
There are commentators who advertise
themselves well
Then there are those who want Ireland to
succeed
Which type do you want?