Paul Krugman on Ireland (New York Times op-ed)

Permabear

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Laminations

Thats a great article

Of the four causal factors, the Irish public could be deemed complicit in only the first - irrational exuberance.

First, there was irrational exuberance: in both countries buyers and lenders convinced themselves that real estate prices, although sky-high by historical standards, would continue to rise.

Second, there was a huge inflow of cheap money. In America’s case, much of the cheap money came from China; in Ireland’s case, it came mainly from the rest of the euro zone, where Germany became a gigantic capital exporter.

Third, key players had an incentive to take big risks, because it was heads they win, tails someone else loses. In Ireland this moral hazard was largely personal: “Rogue-bank heads retired with their large fortunes intact.” There was a lot of this in the United States, too: as Harvard’s Lucian Bebchuk and others have pointed out, top executives at failed U.S. financial companies received billions in “performance related” pay before their firms went belly-up.

But the most striking similarity between Ireland and America was “regulatory imprudence”: the people charged with keeping banks safe didn’t do their jobs. In Ireland, regulators looked the other way in part because the country was trying to attract foreign business, in part because of cronyism: bankers and property developers had close ties to the ruling party.

This irrational exuberance, which people try and throw around as a reason we should all accept blame, is just one factor. The central bank, the government and the regulator are responsible for the other factors and so are majority responsible after all. I also though the coin toss example was good. Where are the consequences for these people?

Laminations

That’s why we need an independent agency protecting financial consumers — again, something Canada did right — rather than leaving the job to agencies that have other priorities. And beyond that, we need a sea change in attitudes, a recognition that letting bankers do what they want is a recipe for disaster. If that doesn’t happen, we will have failed to learn from recent history — and we’ll be doomed to repeat it.

Couldn't agree more.

DF are you not an advocate of free-market fundamentalism?

woodseb

donegalfella wrote: »

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That's a good article. I disagree with your suggestion that it should be completely deregulated as it can't work in practice as in busts like this many institutions are too important/systemic/costly (delete as appropriate) to let fail while the villians in the end are often unable to pay for their crimes so someone has to pick up the bill.

Better regulation is the answer, prevention rather than cure, because the human nature of greed in the face of big profit opportunities will always result in someone else to picking up the pieces

SkepticOne

I would put irrational exuberance above regulatory imprudence as the primary cause since the regulators themselves were caught up in the bubble mentality.

The central bank here at the height of the boom estimated that house prices were only 15% overvalued. How can they regulate when they can't assess the situation.

It's not mere incompetence. If it was it could be rectified by changing personnel at the top. The problem is that the data can always be used to fit whatever outcome you wish. In Ireland's case, demographics - in particular immigration - seems to have been used to justify the increases in prices, but it doesn't really matter what was used.

The problem is that once an abnormal situation goes on for long enough it is no longer regarded as abnormal. Factors that would otherwise be considered irrelevant are then dragged in to justify the situation.

There is no cure since the regulators themselves get caught up in it. 15 to 20% growth during the boom became the conservative way of looking at things for ordinary people, politicians, economists and regulators. There was no incentive to go against this consensus view.

bamboozle

donegalfella wrote: »

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what annoys me most is that the unions in this country are doing their best to lump all the pressure on the door of rogue bankers and property developers while a blind eye is turned to the ineptness of the Financial Regulator, central bank, dept of finance and government.
How Patrick Neary earns a pension of 140k euro a year after prevailing over years of regulatory ineptness is beyond me. Any other country he'd be fired.

Laminations

woodseb wrote: »

Better regulation is the answer, prevention rather than cure, because the human nature of greed in the face of big profit opportunities will always result in someone else to picking up the pieces

If I've said it once, I've said it a million times - better governance and regulation prevents a tragedy of the commons.

Hellm0

donegalfella wrote: »

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donegalfella,
I have noticed previous posts from you espousing ideological principals such as this. The only question I have is why. Even Krugman, a staunch globalist and free market champion, has to admit there are flaws in the "free market" concept. I am eager to hear just what you think will happen were Ireland to adopt an even more extreme set of economic policies as we have up to this point. I would also like to hear an example of these policies causing anything but massive drops in real wages and concentration of wealth within the subject economy.

But then again, who lets reality get in the way of a perfectly workable fantasy.

woodseb

Laminations wrote: »

If I've said it once, I've said it a million times - better governance and regulation prevents a tragedy of the commons.

true, though i think the operative word here is 'better' - i don't think we need more red-tape and committtees - if the financial regulator had acted withing his powers a few years back, alot of this could have been avoided

Laminations

Hellm0 wrote: »

donegalfella,
I have noticed previous posts from you espousing ideological principals such as this. The only question I have is why. Even Krugman, a staunch globalist and free market champion, has to admit there are flaws in the "free market" concept. I am eager to hear just what you think will happen were Ireland to adopt an even more extreme set of economic policies as we have up to this point. I would also like to hear an example of these policies causing anything but massive drops in real wages and concentration of wealth within the subject economy.

But then again, who lets reality get in the way of a perfectly workable fantasy.

From some of the posts I've read, DF wants the reality of concentrated wealth and for the wealthy to avoid paying tax as a choice, cos you know, they are free to choose and who are you to be regulating their behaviour?

Laminations

woodseb wrote: »

true, though i think the operative word here is 'better' - i don't think we need more red-tape and committtees - if the financial regulator had acted withing his powers a few years back, alot of this could have been avoided

Exactly, and if he was punished rather than rewarded for his failure, there'd be incentive there for better regulation in the future

ei.sdraob

woodseb wrote: »

Better regulation is the answer, prevention rather than cure, because the human nature of greed in the face of big profit opportunities will always result in someone else to picking up the pieces

we already have laws and regulations, making more of them is pointless if existing ones are not being followed

as that Prime-time episode has shown the Regulator basically sat back and did nothing, not bothering to do its job at all

it would be like saying, "drug gangs are taking over Dublin so lets make more laws", while ignoring that the Gardai might be understaffed (or on strike) or looking in the other direction

ei.sdraob

Laminations wrote: »

Exactly, and if he was punished rather than rewarded for his failure, there'd be incentive there for better regulation in the future

wow your onto something there

if the Banks were allowed to fail and hence punished for their failure

there would be more incentive not to gamble in the future

oh wait...

Laminations

ei.sdraob wrote: »

we already have laws and regulations, making more of them is pointless if existing ones are not being followed

as that Prime-time episode has shown the Regulator basically sat back and did nothing, not bothering to do its job at all

it would be like saying, "drug gangs are taking over Dublin so lets make more laws", while ignoring that the Gardai might be understaffed (or on strike) or looking in the other direction

Yes thats his point, we just need enforcement, as with the example you give, the drug and gang problems are supposedly being tackled with 'new legislation' when there are sufficient laws there in the first place. More legislation/regulation is just a smoke-screen to make it look like action is being taken. Why should anyone regulate competently when you can retire on a massive salary after complete failure?

Laminations

ei.sdraob wrote: »

wow your onto something there

if the Banks were allowed to fail and hence punished for their failure

there would be more incentive not to gamble in the future

oh wait...

In a world where banks cannot possibly be let fail (although I think Anglo could have been) as punishment or just mere consequence, there remain other avenues for punishment - sackings and removal of boards, civil cases for mismangement, pension fees etc.

We have a pension levy, why cant we have an incompetence levy??

SkepticOne

ei.sdraob wrote: »

if the Banks were allowed to fail and hence punished for their failure

there would be more incentive not to gamble in the future

The problem with this is that they (the banks) did not see what they were doing as gambling. At that time not to do what they were doing would have been considered seriously risky.

Although it is only a few years ago, it is easy to forget the mentality that was going around at the time. Some of this mentality still exists and you see it with the likes of NAMA.

edanto

It's a great article by Krugman.

He hits the nail right on the head. Light-touch, toothless, and complicit regulators deserves a lot of the blame for this situation. After all the corporate personality, if left unchecked, is, eh, rather sociopathic, and needs a moral compass so that entrepreneurial activities will better society whilst turning a profit.

Until we all get into politics folks, there ain't nuttin' gonna change.

ei.sdraob

Laminations wrote: »

In a world where banks cannot possibly be let fail

arguable

since bank failure doesnt have to lead to state failure especially in an age where the central bank can just run the printing presses harder (and they do that anyways under the current Keynesian approach in some countries, btw i like Kruger despite him being a neo-Keynesian )

Laminations wrote: »

(although I think Anglo could have been)

yes they should

Laminations wrote: »

there remain other avenues for punishment - sackings and removal of boards, civil cases for mismangement, pension fees etc.

yes these are needed

Laminations wrote: »

We have a pension levy, why cant we have an incompetence levy??

who will administer it? the incompetent public servants/state ??


anyways the banks would get so big if the investors/shareholders were actually on the ball asking hard questions

and if the original legislation such as http://en.wikipedia.org/wiki/Glass-Steagall_Act were in place preventing banks from becoming too big and taking on too much risk

ei.sdraob

SkepticOne wrote: »

The problem with this is that they (the banks) did not see what they were doing as gambling. At that time not to do what they were doing would have been considered seriously risky.

Although it is only a few years ago, it is easy to forget the mentality that was going around at the time. Some of this mentality still exists and you see it with the likes of NAMA.

thats where the regulator comes in

while i subscribe to the Austrian school which has fairly "laissez faire" approach

it still calls for regulation and strict enforcement of contracts

the problem here and abroad wasnt "little" regulation it was complete absences of regulation

/

Laminations

Df how can you agree with ei.sdraob conception of a regulator when in the OP you said

donegalfella wrote: »

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I also dont understand how a deregulated market can hold anyone accountable. If there are no regulations to break, how can you do any wrong?

Permabear

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ei.sdraob

Laminations wrote: »

Df how can you agree with ei.sdraob conception of a regulator when in the OP you said

theres a difference between


no regulation > anarchy

little regulation and enforcement of contracts > libertarianism

alot of regulation > state suffocation and bureaucracy

SkepticOne

ei.sdraob wrote: »

thats where the regulator comes in

while i subscribe to the Austrian school which has fairly "laissez faire" approach

it still calls for regulation and strict enforcement of contracts

the problem here and abroad wasnt "little" regulation it was complete absences of regulation

I agree there has to be enforcement of contracts but the bubble did not happen because contracts weren't being enforced. And even if the banks knew they would not be bailed out if they failed they would not act differently because it was not their perception that they were gambling. Like most people they believed that house prices were supported by fundamentals (strange as it may seem now).

Laminations

ei.sdraob wrote: »

theres a difference between


no regulation > anarchy

little regulation and enforcement of contracts > libertarianism

alot of regulation > state suffocation and bureaucracy

Yep, without being a libertarian I'd agree with the middle one but he said 'deregulated', I took this to mean no regulation, if he meant a light but well enforced regulation then I stand corrected

SkepticOne

I think those arguing for better regulation or better enforcement of regulation need to come up with an objective way of identifying bubbles while they are ongoing and not simply after they burst.

I believed strongly at the time that there was a massive bubble in the housing market but I was never able to persuade anyone who was caught up in the bubble. I have never seen it done by others either on the various message boards. The bulls stay bulls and the bears stay bears. Discussion merely reinforces the existing position. It is only when the thing burst that the argument is settled and even then (such as with NAMA) the bubble thinking often continues in another form.

ei.sdraob

SkepticOne wrote: »

I agree there has to be enforcement of contracts but the bubble did not happen because contracts weren't being enforced. And even if the banks knew they would not be bailed out if they failed they would not act differently because it was not their perception that they were gambling. Like most people they believed that house prices were supported by fundamentals (strange as it may seem now).

the bubble was caused by interest rates being kept too low artificially by central banks
creating money which had to find a home somewhere
interference in the market caused the problem, more interference aint gonna solve it

edit: if people looking for someone to blame >

SkepticOne

ei.sdraob wrote: »

the bubble was caused by interest rates being kept too low artificially by central banks
creating money which had to find a home somewhere
interference in the market caused the problem, more interference aint gonna solve it

It is certainly one of the factors in kicking off the bubble but once the bubble has started how do you stop the regulators, bankers, politicians, etc. getting sucked in?

fontanalis

SkepticOne wrote: »

It is certainly one of the factors in kicking off the bubble but once the bubble has started how do you stop the regulators, bankers, politicians, etc. getting sucked in?

But you have to feel sorry for the monolithic market! Poor thing.

ei.sdraob

SkepticOne wrote: »

It is certainly one of the factors in kicking off the bubble but once the bubble has started how do you stop the regulators, bankers, politicians, etc. getting sucked in?

as somebody said earlier

prevention is better than cure

also the very same Keynesian's like Krugman advocate putting aside "wealth" (ie saving) during booms, so there's some money available during busts

anyways there's no way to prevent bubbles from forming, the economy is cyclical, something that some people (chose to?) forgot.
you had the likes of Gordon Brown and Bertie claiming that things will never be "bad" again and we entered a new "era of prosperity"

only thing you can do is ensure bubbles doesnt get so big or/and ensure busts end quickly

SkepticOne

ei.sdraob wrote: »

anyways there's no way to prevent bubbles from forming, the economy is cyclical, something that some people (chose to?) forgot.
you had the likes of Gordon Brown and Bertie claiming that things will never be "bad" again and we entered a new "era of prosperity"

only thing you can do is ensure bubbles doesnt get so big or/and ensure busts end quickly

I agree that there's no way to prevent bubbles from forming.

You say you can stop them getting too big. However the point I've made is that once the bubble is established people (including regulators) stop seeing them as such. How do you address this problem?

Permabear

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SkepticOne

donegalfella wrote: »

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I addressed this point earlier. How do you deal with the fact that at the time bubbles aren't seen as bubbles by the market participants, therefore fear of failure doesn't come into the equation?

Sure once the thing collapses everyone realises that they've been foolish but by then it is too late. Then the whole process starts again. "This time it's different" etc.

That is what needs to be answered.

Laminations

donegalfella wrote: »

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Ok so how would a libertarian system deal with the current crisis? The developers owe the banks money they cannot pay, the contracts have limited liability. The banks dont get their money and go bust. Bond holders lose out and dont invest in irish banks. Our banking system fails and we all suffer the consequences.

Or do you think having this knowledge of consequences will regulate behaviour? was there not a knowledge of consequences already? I definitely knew if I failed to pay money, the bank comes a knocking and I'd guess everyone knows that - people still overborrowed. On the one hand you appeal to our human nature above any laws or ideals or aims for betterment.

donegalfella wrote: »

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but then you think mere awareness of consequence will change behaviour? Have a look at some addiction studies. You cant educate someone out of disordered behaviour and thats exactly what caused this mess, a load of disordered behaving

Permabear

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Laminations

donegalfella wrote: »

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In order to ensure that the taxpayer does not become liable for individual and institutional financial recklessness you need to change behaviour. The example you give is the way it is now, or at least how it is supposed to be - I borrow money, I owe the bank, the bank is answerable to its shareholders. So I cant pay, I have limited liability, the bank gets no money, everything goes bust and everyone suffers the consequences just like now, and I've used my borrowings for wealth creation for myself which is now untouchable, just like now. Why under a libertarian situation of 'real' consequences should I not borrow? Or is it that you really think its the case that the banks on their end, wont lend?

woodseb

donegalfella wrote: »

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the system above only works in small doses, when you have a systemic failure of the size of the credit crunch the courts and the free market are ineffectual in redressing the balance imho

for example;

bank knows that if it makes too many risky loans, it will be punished by its shareholders and depositors

a bank can only be punished by its depositors so far - a run on the bank will cause the collapse of a bank before all the depositors get their money out. Also, a bank be punished by its shareholders to a certain degree but when share prices really plummet to the extent they have in the last couple of years, its shareholders are the very ones punished by a lower stock price?

A libertarian society is indeed a utopia, i would like to live in one because i trust myself to live within norms, but i don't trust others to do the same;)

Laminations

You talk about incentives, interests, expectations. These are the tools of operant conditioning, a most explicit form of coercion. Dont pretend its not behaviour change you seek, your libertarianism aims to mould behaviour by heightening awareness of consequences. The unfortunate thing about humans is that we act irrationally even when we know the dire consequences involved - we smoke, we drink, we binge, we gamble and we borrow and lend money that we shouldn't. Libertarianism, like light-touch regulation would fail. I'm not advocating heavier regulation, just better enforced policies.

SkepticOne

donegalfella wrote: »

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But didn't great wall street mania of the 1920s happen during the gold standard?

SkepticOne

The libertarians solve the problem by not concerning themselves with it.

The advocates of better regulation have to deal with the problem that the regulator can get sucked in to the bubble. This creates the additional problem in that ordinary people think the market is being regulated when in fact it is not. The absence of regulation is better in such circumstances. At least people know they are on their own.

Sleepy

SkepticOne wrote: »

It is certainly one of the factors in kicking off the bubble but once the bubble has started how do you stop the regulators, bankers, politicians, etc. getting sucked in?

You take the regulatory power outside of the economy and place it somewhere else: e.g. Canadian regulatory body regulates our banks, we monitor Spains, Spain monitors Japan etc.

SkepticOne

Sleepy wrote: »

You take the regulatory power outside of the economy and place it somewhere else: e.g. Canadian regulatory body regulates our banks, we monitor Spains, Spain monitors Japan etc.

Or some sort of international body that countries can sign up to.

Liam Byrne

SkepticOne wrote: »

The advocates of better regulation have to deal with the problem that the regulator can get sucked in to the bubble. This creates the additional problem in that ordinary people think the market is being regulated when in fact it is not. The absence of regulation is better in such circumstances. At least people know they are on their own.

This is actually a very valid point.

Lots of people have castigated "the public" for exacerbating the problem, with some people taking out bigger loans than they should have, bearing in mind that property was already overpriced and was bound to stop increasing.

But when you had people like Ahern dismissing valid warnings about overheating, and banks using phrases like "property ladder", then you were obviously going to wonder whether you were being too cautious.

After all, Ahern was a previous Minister for Finance; surely he knew what he was talking about, right ?

After all, the banks wouldn't throw money away on risky ventures, now would they ?

And all those on-the-bus ads about "the Financial Regulator" meant that he existed and was working, right ?

Wrong. But we assumed that they did. And all 3 failed us.

SkepticOne has a point. If we had been aware that none of the above 3 were trustworthy - that they were effectively non-existent - then we would have been better off.

opinion guy

donegalfella wrote: »

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We had a deregulates free-market system. Not by design, but by the fact the regulator did nothing.

How do you explain canada which is more regulated but escaped disaster ? Kind of contradicts your ideas no ?

Valmont

Laminations wrote: »

You talk about incentives, interests, expectations. These are the tools of operant conditioning, a most explicit form of coercion.

Operant conditioning has nothing to do with coercion; it is simply a fundamental law about how humans and animals learn. People and animals tend to repeat certain behaviours that lead to rewards. Please don't try and twist this into an anti-capitalism rant.

ei.sdraob

opinion guy wrote: »

We had a deregulates free-market system. Not by design, but by the fact the regulator did nothing.

How do you explain canada which is more regulated but escaped disaster ? Kind of contradicts your ideas no ?

i posted in that earlier

there's a difference between some regulation and NO regulation

Liam Byrne

Valmont wrote: »

Operant conditioning has nothing to do with coercion; it is simply a fundamental law about how humans and animals learn.

But surely if someone is aware of "how humans and animals learn", they can manipulate that to achieve a desired result ?

Is that not an almost subliminal coercion ?

silverharp

SkepticOne wrote: »

But didn't great wall street mania of the 1920s happen during the gold standard?

you might find this interesting

http://www.bis.org/publ/work137.pdf

BIS Working Papers

No 137

The Great Depression as a

credit boom gone wrong

The Austrian view,
with roots in the work of Ludwig von Mises (1924) and Friedrich von Hayek (1925), focused on the divergence between the market rate of interest and the natural rate of interest.6 When the market rate fell below the natural rate, Mises and Hayek argued, prices rose and investment
boomed. The source of that divergence, according to Mises, was the banking system, freed from the disciplining influence of the classical gold standard. Excessive credit creation by banks, both central and commercial, encouraged asset price inflation, fueling consumption and
investment. The longer that asset-price inflation was allowed to run, the greater were the depletion of the stock of sound investment projects and the accumulated financial excesses Moreover, the more severe became the subsequent downturn. The credit boom thus contained
the seeds of the subsequent crisis. The policy implication was that countries should avoid monetary arrangements that allowed significant divergences between the market and natural rates of interest (in particular, a gold standard of the rigid prewar variety was preferable to the more malleable interwar vintage) and that they should allow the downturn to proceed in order to purge unviable firms and investment projects from the economy, thereby clearing the way for
sustainable recovery.

The definitive application of the Austrian model to the Great Depression was by Lionel Robbins (1934) in a book largely responsible for popularizing the name now attached to this episode. Robbins attributed the Depression of the 1930s to the unsustainable credit expansion of the 1920s. Blame for that credit expansion he in turn laid at the doorstep of the Federal Reserve System, which had kept interest rates below the natural rate for too long in the hope that low rates might help Britain surmount its balance-of-payments problems and thereby solidify the reconstructed gold exchange standard, and ultimately on the doorstep of the new gold standard itself, which gave central banks more leeway to manipulate policy. This divergence between market and natural rates stimulated the provision of bank credit, allowing the development of financial excesses which, when revealed, led unavoidably to the downturn, the financial crisis,and the Depression. Central banks were misled into inaction by the tendency for the credit boom to stimulate not just aggregate demand but also aggregate supply (through increased production of consumption goods and growing investment in capacity). But, according to Robbins, the quality of much of that additional capacity was inferior. The credit boom had the qualitative effect of providing a favourable atmosphere for the fraudulent operations of sharks and swindlers, which meant that neither the expansion of supply nor the high level of asset prices was sustainable and only set the stage for a disruptive crisis. Moving from diagnosis to prescription, Robbins recommended against monetary and fiscal measures to counter the downward spiral, insisting that the economy needed to be cleansed of financial and nonfinancial excesses to set the stage for a sustainable recovery.

Valmont

Liam Byrne wrote: »

But surely if someone is aware of "how humans and animals learn", they can manipulate that to achieve a desired result ?

Is that not an almost subliminal coercion ?

I believe it is called teaching in some circles.

Honestly, using a pejorative synonym for an otherwise benign term is intellectual dishonesty of the highest order.

Liam Byrne

Valmont wrote: »

I believe it is called teaching in some circles.

Honestly, using a pejorative synonym for an otherwise benign term is intellectual dishonesty of the highest order.

Teaching is OK, and I have no intention of misrepresenting that.

I'm just pointing out that it is possible to use knowledge about how things are "learnt" to teach in a biased or manipulative way.

And yes, there are varying degrees of this, some more socially acceptable than others.

So I was just pointing out that it was possible for it to be both benign and manipulative.....there's no dishonesty in that fact.

opinion guy

ei.sdraob wrote: »

i posted in that earlier

there's a difference between some regulation and NO regulation

Yes Ireland had effectively no regulation
Canada had some regulation.

Canada faired better. QED

Laminations

Valmont wrote: »

I believe it is called teaching in some circles.

Honestly, using a pejorative synonym for an otherwise benign term is intellectual dishonesty of the highest order.

I'd appreciate it if you didn't lecture me on what operant conditioning is. I'm quite sure i know more about it than you. Read Walden II or any of Skinners experiments or even the Wikipedia entry on the topic. As a type of conditioning it provides external motivation to engage in or desist from engaging in certain behaviours. I'm not anti capitalist, but suggesting that capitalism or facets of libertarianism don't aim to mould people into behaving a certain way is bullcrap.