The profile of Irish investment preferences discovered by Barclays Bank in preparing their latest issue of Wealth Insights is depressing.  According to press reports, their research shows that Irish high-net-worth individuals (HNWIs) hold an amazing 55 per cent of their wealth in property, despite the collapse in property values in the past 5 years.  This is a higher proportion than any other nationality.  Irish HNWIs also hold 18 per cent in cash, 16 per cent in financial investments and 7 per cent in assets such as collectables.  And just how much private wealth do you think is invested in enterprise or business, the sector which is arguably the most vital to our economic future?  A pitiful 2 per cent.

A long legacy of under-taxation of property assets and transactions, only partly being addressed now, is an important factor in this mis-allocation of investment funds.  We all continue to pay a price for past policy failings in this area.

Historic factors are often also quoted as an explanation for our obsession with property. There is a pithy phrase in the famous Vanity Fair article by Michael Lewis (“When Irish Eyes Are Crying”) about how we crashed our economy:

Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons.

That sums it up nicely.

It’s simple really.  As John Maudlin says: “… the money to solve the crisis does not exist. The only way to find it is for the ECB to print money and print in size, enough to lower the value of the euro and make exports cheaper (which gives southern Europe a chance to grow out of its problems).”

That’s step one.  But there would remain the problem of the relative uncompetitiveness of the peripheral countries, especially Greece.  So here is my cunning plan, worthy of Baldrick at his best: all German workers would be required to be given a 30% wage increase by their employers.  (Same would happen in quasi-German satellites such as Finland, Austria, Netherlands.)

This would, at a stroke, level the competitiveness playing field within the Eurozone while, at the same time, putting lots of new Euros into the hands of Germans to spend on Greek holidays, Spanish wine and Italian shoes.

Ahern remains delusional

19 October, 2011

Apparently the press is to blame for the collapse of the Irish economy.  At least that appears to be the latest line being spun by Bertie Ahern.  Unbelievable. You couldn’t make it up.  See details of an interview with our dodgy, delusional, and disgraced former Taoiseach here.

A flavour of his ramblings:-

Former Taoiseach Bertie Ahern has called for an investigation into the media for what he said were failures to follow the economy because journalists were more concerned with following his dealings with the Mahon tribunal.

Mr Ahern said that from the time he began evidence to the tribunal, the media “just stopped following the economy”.

In an interview on Dublin City University’s radio station DCU FM, he said: “There should be an investigation into it. They should have been following the economy from August 2007, but they weren’t, they were following me. I think a lot of these guys really should have looked at themselves.

“The government were following the economy but the media weren’t. It was a very poor job by the media really. They were shown to be incompetent and that was the trouble – everything was on me.”

When will he ever recognise that the ultimate responsibility for the well-being of citizens came with the job of being Taoiseach, and it wasn’t just about lining his own pocket and being nice to his developer pals?  Trying to deflect responsibility to the media for our economic problems is beyond a joke.

Please, Bertie, get off the stage.

The Sunday Business Post had an article yesterday describing how “a new type of insurance product could help consumers to cut the premium they pay on other insurance policies”.   As I read the article, I became increasingly concerned about the consequences of the product described.

Irish insurance firm Blue Insurances …. will launch an excess insurance policy in the coming weeks. …. An excess is the part of any insurance claim that you have to pay yourself. For example, on a policy with an excess of €100, the customer will pay the first €100 of the cost of any claim, with their insurer covering the balance ….. Blue Insurance’s new product will allow customers to insure the excess applied on a range of products, such as home insurance, motor insurance, pet insurance and travel insurance policies. Customers can insure to a total of €750 in excesses …. Typically with insurance policies, having a higher excess can help to reduce your overall premium.

Why is this a bad idea?  Because the normal policy excess exists for very good reasons:-

  • by requiring that the insured person has a material financial interest in protecting against loss, the size and incidence of claims is lowered, and everybody gains through lower insurance premiums
  • it eliminates small claims which are disproportionately expensive to administer – again, everybody benefits from lower premiums as a result

So the effect of this new product being made available will be a much higher level of claims generally.  And it’s clear that the people who will be attracted to this new offering will be those who (for a variety of reasons) are most likely to be making claims.  The result will be higher premiums and a net loss for everybody (except those who have the excess cover and actually make a claim).  This is a classic “Tragedy of the Commons” in the making.

I am at a loss to understand the business model being adopted by Blue Insurances here.  I can’t see how they will avoid massive losses on this product, as the people who are most incentivised to take up this policy are the worst risks from an insurance perspective, not to mention prospective scammers and fraudsters.  I predict that the product will be withdrawn or modified before long, but probably not before it has caused unnecessary cost and inconvenience for nearly everybody.

I hope the major insurance companies will react by declining cover to anybody who insures all of any policy excess; it’s essential that insured persons have some financial interest in avoiding claims.

It’s an established part of the Irish economic and political cycle.  Just when we are starting to see Christmas goods appear in the shops (in October, damn it), then we also start to hear the plaintive and deceptive tones of the special-interest groups trying to bend the ear of the Minister for Finance, and promote their own causes at the expense of everybody else’s.

There is a pattern to these transparently self-serving submissions.  Reduce (or more likely these days, don’t increase) the tax on this activity or that product, they say, and the effect will be a wonderful growth in jobs and prosperity, which will more than offset the tax foregone.  Alternatively, NGOs and quangos fire off a fusillade of demands that this allowance or that subvention should not only not be reduced but that, because their constituents are uniquely vulnerable, it should be increased (with wholly beneficial effects on the economy, of course).

And newspapers and other media blandly regurgitate the related press release without adding some proper analysis.

I am reminded of the famous candlestick makers’ petition revealed to us by Frédéric Bastiat (1801-1850) wherein they asked the French government “to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat”.

And how did our resourceful candlestick makers justify their demands? By pointing to the wonderful effects such a law would have on economic activity:

First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.

Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.

It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

A wily bunch, these French candlestick makers.  But our own special-interest groups are more than a match for them.  I can already hear the thundering hooves as they launch their cavalry at the poor Minister, armed with blustering press releases and practised in tugging at our heart-strings.  Pass the popcorn.

Dan O’Brien had a good piece in Saturday’s Irish Times about house prices in Ireland.  But a couple of comments should be made.

Firstly, Dan (or the sub-editor) gave the piece the title “How low can house prices go?”  While the article was interesting in many respects, I don’t recall him answering that particular question.  OK, so headlines are always making false promises which the actual article fails to deliver;  not exactly Man Bites Dog.  Also, if you read the article expecting to see Dan’s own view, you would have been disappointed.

In fairness he does say “If the 2011 rate of decline in residential property prices continues for another 12 months, prices will fall by about 15 per cent from their current level. Given the headwinds facing the market, that is more likely than not.”  And he also notes that the Banks’ Stress Tests had a baseline assumption “that prices will fall by a further 20 per cent before the market hits bottom. In their worst-case scenario, the decline would be almost 30 per cent. That would bring the fall from the 2007 peak to 59 per cent.”

But it would have been nice to have the personal view of the Economics Editor of the Irish Times on the matter.

Secondly, and more surprisingly, Dan doesn’t seem too hot on the calculation of percentages.  Two sentences in the article offer contrasting views on the extent of the rise in Irish house prices during the bubble phase:

Compare “In the decade from the index’s start date, in early 1997, Irish property prices quadrupled” with “Although the US did not look out of the ordinary in the property-price rises it experienced from 1997 to 2006 (130 per cent compared with Ireland’s 400 per cent), it has suffered the second-worst rich-world crash (after Ireland)…”

Surely Dan doesn’t think that if a number quadruples, it has risen by 400%?  Surely he knows that it has only risen by 300%?  Must be an error by the pesky sub-editor again.

Lowry should read Bastiat

27 September, 2011

So former Fine Gaeler Michael Lowry is miffed that the Government has turned down the plan he was promoting for a super-casino in Tipperary. That’s not a surprise, nor is it a surprise that the present incumbents have taken the first available opportunity to stick it to Michael, given his disgraceful and self-serving support of the last Government.  Of course it’s always possible that the fact that Lowry (whom Matt Cooper described as the most disreputable politician he’d ever met) was involved had nothing to do with the decision, and that it was made entirely on its merits. Anyway, the decision was undoubtedly the right one, whatever the reasons for it.

The Irish Times reported that

Mr Lowry …. said he wanted to support plans that would bring an economic boost and up to 2,000 jobs to his Tipperary North constituency….Thurles Chamber of Commerce president Austin Broderick said the area was “totally devastated” by the Government’s refusal to allow a large casino. “It’s unreal. One thousand jobs gone down the Swanee…”

Here we go again, with alleged job creation/saving potential being used to justify everything from continuance of dodgy tax breaks to loss-making capital investments, to opening yet more shops.  John Kay has neatly disposed of similar fallacies (see here), but to see the rebuttal done elegantly and forcefully, one needs to travel far back in time and read the works of Frédéric Bastiat (1801-1850), particularly his famous Parable of the Broken Window.

In Bastiat’s tale, a man’s son breaks a pane of glass, meaning the man will have  to pay to replace it. The onlookers consider the situation and decide that the  boy has actually done the community a service because his father will have to  pay the glazier to replace the broken pane.  The glazier will then presumably spend the extra money on something else,  thus helping the local economy. The onlookers come to believe that breaking  windows stimulates the economy, but Bastiat exposes the fallacy. By breaking the window, the man’s son has reduced his  father’s disposable  income, meaning his father will not be able purchase new shoes or some  other luxury good. Thus, the broken window might help the glazier, but at the  same time, it robs other industries and reduces the amount being spent on  other goods. Net result: a loss to the economy overall.

Building a super-casino in Tipperary may create jobs, but overall it will have a negative effect on the economy as it will divert limited investment capacity from more sensible (and more socially responsible?) projects which, as it happens, would also create jobs.