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New and notable progressive economic ideas.
The Housing Crisis is an Anglosphere Phenomenon
In Ireland we find it very easy to fall into the trap of thinking that the troubles we face are uniquely Irish in nature. I’m sure we’re not alone in this. When we discuss the crises in Housing or Healthcare, the temptation is always to blame this minister or that one, a specific policy or a cultural attitude that is uniquely Irish. “The HSE is uniquely inept” “After colonialism we all tell our kids that rent is wasted money”.
A major problem with this analysis is that it isn’t always supported by the data. On housing, for example, the pattern we see in Ireland – home building dramatically trailing population growth and house and rent prices far outstripping wage inflation – is repeated in many other countries too.
This same pattern is present in *some* countries, but not others. So instead of wondering what we’ve been doing wrong on this island, we should be asking what we have in common with countries who face the same problems as us. To me, the most coherent group seems to be the “Anglosphere”. The US, UK, Canada, Australia, New Zealand and us.
John Burn-Murdoch published a great piece of analysis in the Financial Times this week, offering some suggested reasons why the anglosphere might be struggling with housing policy.
He places much of the blame on our distaste for apartment living. The cultural significance of the standalone family home and the facilitation of objections to new apartment buildings across the anglosphere.
“Across the OECD as a whole, 40 per cent of people live in apartments, and the EU average is 42. But that plummets to 9 per cent in Ireland”
I’m not sure if his focus on apartments tells the full picture, but his framing of the problem as an “anglosphere” one is spot on. Here are some additional hypotheses on why the anglosphere stands apart:.
Seán Keyes at TheCurrency.ie: “My pet theory is common law derived planning in Anglophone countries (more uncertain) vs Napoleonic planning in Europe (less uncertain)“
Many, including Venture Capitalist Brian Caufield noted the “Differential in net immigration between Anglophone and other countries“. We have strong economies that need to pull in workers, causing population growth to outstrip housing growth.
Twitter user Gok pulled together a graph showing the different rate of population growth in Anglosphere vs. other developed nations.
Twitter user firebrand Dove shares her theory that there are two, separate drivers in different parts of the anglosphere” “US/Aus/Can went for low density because so much land was available. The UK suburbs and the greenbelt were the opposite: a reaction against Victorian era slums. ”
And for balance, there are some who feel this is a positive and correct attitude to have towards apartment living. American houses are dramatically larger than Italian apartments. James Morrow of Australia’s Daily Telegraph captures this view as “God forbid people don’t want to live in high-rise human filing cabinets.“
Lots of good hypotheses for testing and a good reminder that the solutions we’re looking in housing for are broad and systemic, not local or personal.
📰 Trending News
Irish economic news, in summary and context.
Have We Done Enough to Prevent a New Credit Crisis?
Over-simplistically, a bank takes in deposits from businesses and households, keeps a small amount in reserves (~10%) and lends the rest out (~90%). They remain in good shape as long as the value of the loans they’ve made combined with the money that they keep to one side is higher than the deposits they’ve taken in.
One way that this can go wrong is when the value of the loans they’ve made drop. For example, if most of their lending is through mortgages and the price of property falls by 10%. They might have only had a 10% buffer, so things can start to get dicey.
This is what happened to bank in Ireland (and elsewhere) in 2010.
Since then we (the EU, US and others) have built up a series of new rules and regulations to try to stop banks from getting in this sort of trouble. Broadly speaking, the more systemically important a bank is, either to the local economy or the global financial system, the larger the “buffer” of reserves they have to maintain.
Smaller regional banks in the US (such as Silicon Valley Banks) successfully lobbied to get themselves excluded from these rules by being designated as not-systemically important.
So in a way we have a bit of a test case to see how well the design and application of these new rules are working at preventing credit crises like we experienced a decade ago. We get to see if the rules applied to “systemically important” banks help prevent another credit crunch. And we get to see if the line for “systemically important” was drawn at the right place.
This time around, the focus is less on mortgages and more on bonds. Instead of lending out it’s deposits as mortgages, another thing a bank might do is lend money to governments. This is done by buying government bonds.
If you bought a 10 year Irish government bond this time last year, it would have had a fixed interest rate of 1%. Since then interest rates have been rising. Now if you buy a 10 year bond it comes with a fixed 3% interest rate! Triple the return!
So if a bank bought €1bn worth of government bonds last year and is forced to sell them today, they won’t get €1bn for them. Who would pay full price for a 1% bond when you can get a 3% one for the same price?
The rules and regulations we put in place should account for this sort of thing, so how are they faring?
Regional US banks gained exemption from the rules by being placed below the threshold, and some didn’t prepare properly for the rise in interest rates. The week before last one of them (Silicon Valley Bank) collapsed and last week another (First Republic) needed rescuing from peers, and is still very unsteady. Generally, billions of dollars of deposits are moving from the regional banks to larger ones (which are covered by the new rules).
Last week Credit Suisse also got into trouble, but being a large Swiss bank, not a small US one, they were above the threshold, considered to be globally systemically important and therefore bound by the new rules. So does this mean the rules are weak?
Credit Suisse claim that they were well prepared for the rising interest rates and had a strong balance sheet. It seems that Credit Suisse was a multi-year, slow motion train wreck and this time of turbulence just tipped it over the edge. The kind of thing that any amount of rules can’t (and probably shouldn’t) prevent. So it’s demise isn’t a very reliable test of the rules.
We can certainly see that banks which weren’t bound by the rules aren’t holding up well, but it remains uncertain what this means for the larger banks. 6 banks in Ireland are bound by a version of these higher rules.
This isn’t causing widespread panic yet, but as house prices continue to fall and the ECB continues to raise interest rates (another .5pp this week), people are still looking around nervously.
- Matt Levine: UBS Got Credit Suisse for Nothing Link
- Video: The End of Credit Suisse Link
- Irish Times: Lagarde insists there’s no conflict between higher interest rates and financial stability link
- Financial Times: Silicon Valley Bank is a very American mess Link
Our Economy is Strong But Unsteady
After a wave of layoffs in the tech sector (disclaimer: including at my employer, Meta) the Central Bank recently published an article on “The Role of the ICT Services Sector in the Irish Economy” as part of their March Quarterly Bulletin (p86).
“To date, the scale of the downturn affects a small proportion of overall ICT employment in Ireland. Nevertheless, the dependency of the sector on a small number of large firms illustrates the wider structural vulnerability of the Irish economy to firm or sector-specific downturns.”
Laura Slattery in the Irish Times reports:
“Ireland’s reliance on the international tech sector poses risks to growth, employment and tax revenues in the event of a severe or prolonged downturn, an article published by the Central Bank of Ireland warns.
The authors of the report recommend that the risk is lessened through policies that increase investment and productivity in indigenous tech firms, while they also say the negative effects of any future sectoral downturn will be reduced by the Government’s recent policy of saving corporation tax bonanzas in the National Reserve Fund.”
This is our perennial first world problem. An Irish person who works for a multinational company (e.g. in Pharma, medical or tech) is dramatically more productive than one who works for a domestic company. We benefit from this, but precariously so.
As I mentioned before, closing this productivity gap is our big economic opportunity. It will take our current position (very good but out of our control) and cement it as predictable, generational prosperity.
Disclaimer: I write this newsletter as a hobby, in a purely personal capacity. None of the writing expresses the views or opinions of my employer.