Sunday, September 29, 2019

Irish property "Ponzi scheme" vs. Brexit delusion

In April 2019 the National Treasury Management Agency (NTMA), which is the agency that manages the assets and liabilities of the Government of Ireland, published a paper,  'Characterising the Financial Cycle in Ireland,' by Rossa White, chief economist of the NTMA, and Lisa Sheenan of Queen’s University Belfast, in which they characterise the Irish property bubble period of 2001-2008, "a Ponzi scheme...with ruinous cost."

I)  What is striking is the level of delusion that prevails/ prevailed in both countries in respect of the property bubble and Brexit;

II)  Decision-making is much more emotional than rational i.e. facts are often ignored;

III) Decision-makers/journalists/commentators/voters rarely acknowledge having been wrong;

IV) Outside of the UK, Brexit has got huge coverage from Irish media outlets;

V)  Commentary in Ireland has typically been laced with schadenfreude with limited attention given to the over-reliance of indigenous food exporters on the British market;

VI) The Irish amnesia about an economic disaster that hurt many people, is astounding.  

Irish property "Ponzi scheme"

There were 357,000 Irish job losses in the period Q2 2008-Q1 2012 — a fall of 16%; thousands of company collapses and people who faced mortgage difficulties.

Last month I chronicled here how political leaders, senior civil servants, central bankers, business people, trade unions, journalists and a significant number of voters had believed that Ireland had invented the free lunch:

Ireland's transactional membership of the European Union

In 2007 Bertie Ahern, the taoiseach, in Johnsonian fashion, wondered why dissenters from the deluded consensus did not commit suicide.  

The NTMA doesn't endorse the views of the authors of its research papers but it's welcome that it publishes inconvenient truths.

White and Sheenan write:

"In effect, the property market became a Ponzi scheme, fuelled by inflows of foreign capital. It became increasingly susceptible to a liquidity freeze. Cracks showed long before the collapse of Lehman Brothers when the European Central Bank (ECB) hiked interest rates eight times from 2% to 4% in the eighteen months to mid-2007. Inward capital flows plateaued around that time before dramatically reversing in September 2008. Ireland’s domestic banks were insolvent. House prices collapsed by 55%, while commercial property lost two-thirds of its value. Gross national income per capita declined by 21% between 2007 and 2011. The financial cycle had accompanied the genuine boom in the late 1990s but discovered a life of its own to drive the extension of the cycle in the 2000s; with ruinous cost."

Some of the deluded retired on big pensions while others remain in positions of responsibility.

John FitzGerald, who retired as a research professor at the Economic and Social Research Institute (ESRI) in December 2014 after 30 years of service, was a rare exception.

FitzGerald told the Banking Inquiry investigation of Ireland's financial collapse that the ESRI's 'Medium-Term Review 2008-2015', which was published on May 14, 2008, "took no account of the potential financial collapse that might occur in the US and, especially in Ireland. It did not provide any preparation for the dramatic shock that was to hit the Irish economy five months after the Review was published."

The economy had "the potential to grow at around 3.75% a year over the coming decade, despite significant short-term problems." The ESRI report added that the drivers of Irish economic growth were changing. "Exports of business and financial services are a vital contributor to growth" — this too was wrong as data were heavily polluted by the Double Irish tax scam.

Irish amnesia and schadenfreude

Britain leaving the European Union doesn't make economic sense. After all, the period of its membership —1973-2018has been its best economic performance since the 1860s, based on estimated data.

The UK was the fifth-largest economy in the world in 2018 but as Martin Wolf of the Financial Times has noted, "The world contains three economic superpowers: the US, the EU (without the UK) and China. These generated about 60% of global output last year. The UK’s contribution was 3%. It is large for a minnow, but still a minnow."

Almost half of UK exports go to the other 27 member countries of the EU.

Too many people ignored the economics and fell for the delusion that the UK could “take back control.” 

How could they be so foolish or stupid wonder the Irish?

It's not a surprise that Ireland would be concerned about Brexit given that the mainly indigenous food sector relies on Britain for 40% of its exports and the risk of a return to border controls with Northern Ireland is viewed as a threat to the Irish-UK Good Friday Peace Agreement of 1998.    

However, there has been a torrent of Brexit coverage by Irish media outlets.

In July 2018 the Reuters Institute for the Study of Journalism at Oxford University published a survey of Brexit news and opinion pieces from 39 media outlets in a sample of 8 European Countries (Germany, Greece, France, Ireland, Italy, Poland, Spain, and Sweden). See chart above.

Researchers coded the complete Brexit coverage between September 1, 2017 and March 31, 2018, in total 4,553 media items.  The analysis included two newspapers, a political magazine, a TV news show, and an online outlet in each of the countries.

Ireland accounted for 40% of the coverage.

"French media reported Brexit as more of a challenge for the UK than for the French or the EU; interest in the future of the EU was highest in Sweden and Greece. Spanish, Greek, and Irish media, in particular, expressed strong views against Brexit, while Italian, Polish, and French media were slightly closer to presenting a mixture of arguments."

Irish Brexit commentary has mainly reflected a mix of property bubble amnesia and schadenfreude that the former imperial ruler is in such a pickle over exiting the European Union.

Facts, lies and distortions

The Brexit Leave campaign famously had the slogan, ‘We send the EU £350 million a week, let’s fund our NHS instead’ on its campaign bus. 

It was a lie and a month before the June 2016 referendum the UK Statistics Authority issued a statement, "As we have made clear, the UK’s contribution to the EU is paid after the application of the rebate. We have also pointed out that there are payments received by the UK public and private sectors that are relevant here. The continued use of a gross figure in contexts that imply it is a net figure is misleading and undermines trust in official statistics."

It didn't matter.

Irish data with its potential for distortion can also be used for propaganda.

Alfons López Tena is a former member of the Catalan Parliament and he cites in a tweet distorted data from David McWilliams:

1) Only 11% of exports went to the UK in 2018? — from the total tradeable export value of €373bn (ex-tourism + transport), over 200,000 workers in indigenous firms could only produce exports of €25bn while a similar total of 200,000+ miracle workers in foreign-owned companies produced €348bn!

My estimate is that about €200bn of the value is fake. Thus McWilliams' denominator is fake!

2) Irish firms employ more in UK than British firms in Ireland?

The Central Statistics Office (CSO) Irish affiliate employment overseas data are highly distorted. Britain's  Barclays Bank is now Irish and anyone who believes that real Irish firms employ 856,000 overseas including 290,000 in Asia, is a fool. There are even 10,000 Irish firm jobs in Oceania And Polar Regions in the Southern Hemisphere. Imagine that!!

3) The Irish are 25% richer than the Brits?

It's a shame then that occupational pension coverage in the Irish private sector is only at 29%!

On adjusted disposable income, which is below the UK's and other metrics, the claim here is false.

4) Since 1995, Irish national output is growing 5 times the UK level?

Modified Gross National Income data, which strips out some of the multinational distortions, is not inflation-adjusted. 

Irish consumer price inflation in 1995-2018 was 52%.