Dr Aidan Kane – The banking crisis from Digital Revolutionaries on Vimeo.

My slides are here.

The videos for the other speakers, John McHale, Ronan Lyons and Seamus Coffey are here

I was slotted to speak about the banking crisis–I should explain, as a stand-in for a colleague who actually knows something about this, but I stepped up to the plate anyway. It was an opportunity to pull together some thoughts that I’d been thinking about for a while.

I sketched an argument which first asked why we had such a dysfunctional financial system in the first place, i.e., one that, once liberalisation and entry to EMU happened, couldn’t fulfil the basic functions of finance, at least not without eventually failing systemically, and in the process, endangering state solvency and destroying large parts of the economy. I argued that in both the 18th and 19th centuries, our financial development was in some respects, quite precocious. In the 18th century, we had a fairly impressive national public finance system in Ireland, comparatively speaking, as evidenced initially in the evolution of a public debt and a recognisably modern system of public accounts. This public finance system might have been expected to underpin the evolution of more sophisticated financial markets and private institutions, as is argued was the case in much of the ‘financial revolution’ literature for other countries from the late seventeenth century.

In the 19th century, scholars have explored the dimensions of some fairly impressive micro-finance institutions, particularly in the pre-Famine era. Most notably, hundreds of ‘loan fund societies’ extended millions of loans to poor people not remotely served by the emergent banking sector. Fast forward to the 20th century and find we had a fairly stagnant private financial sector pre-Tiger. Why? Note that in the intervening periods, the state had taken on a substantial role as financial intermediary, which may have pre-empted private efforts. Three particular domains of state financial intermediation stand out:

• state finance for land purchase, on a particularly large scale from about 1903, but continuing through the 20th century,
  
• state finance for housing, comprising substantial grants and lending from central to local government, and onwards lending to individuals, as well as direct lending –again, spanning pre- and post-Independence eras, and
  
• state finance of industry, both of state-owned enterprises, directly and through state-banks, and through other mechanisms, including loan guarantees and trade credit insurance.
  

(There are other examples: not least state small savings schemes, and perhap a little bit of old-fashioned financial repression, as argued by Reinhart and Sbrancia (2011), whereby the state partially financed itself by imposing low returns on captured financial institutions.)

The data I presented on the three mechanisms above are by no means comprehensive and I suspect the argument has been considered more carefully before. Nevertheless, it’s suggestive to me of a form of institutional crowding out. Perhaps the state’s efforts (in some respects understandable responses to perceived capital market failures) pre-empted the development of a more dynamic, functioning private financial sector. When the Tiger arrived and the state stepped aside, perhaps the private financial sector hadn’t the institutional memory or capacity to fulfill relatively basic functions. Remember that the eventual failures, as has been noted on many occasions, were ‘plain vanilla’ involving rather uncomplicated mortgages products and a fairly unsophisticated approach to lending for commercial property.

I did try to link this apparent gap in the evolution of a financial sector to deficiencies in our democratic governance, and contrasted those deficiencies with the virtues of the blogosphere in the current debate on economic policy in Ireland.

Blogs and the social media generally are fairly open systems, with low barriers to entry. There is genuine diversity of insight and outlook, if you go looking for it, and autonomy from state agencies. My sense, in common with many others, is that state is fairly dominant in the Irish policy debate, and that the autonomy of other actors in civil society, (including universities) is under severe pressure. Without overstating the potential, I’m often impressed with the way in which some blogs enrich the debate and challenge those dominances. It seems to me that we see in the blogosphere a reflection of a potentially dynamic civil society which can otherwise be dormant or invisible. I don’t see economics blogs as being about only ‘experts communicating economics literacy’ from on-high to the great unwashed. There’s a much more dynamic set of interactions rightly involved, and in many cases, a healthy challenge to previous intellectual monopolies.

This work is in progress: while most of the data collection is done, some cleaning-up remains to be done–in particular some more work on handling missing values around the years 1810 to 1822: so some of the Ireland aggregates for those years reported here are not final and should be treated with caution.

I’d be happy to notify anyone interested of updates to this, in particular when a working paper is available: just drop me an email at aidan.kane@nuigalway.ie

Downloads:

• Slides

• Charts of total presentments 1775-1898 (for most juries, data is available from 1810)

• Charts of presentments for each grand jury by purpose

You can download the pdf file of my slides here.

I’m going to keep an email list to update people on this: just send me an email aidan.kane@nuigalway.ie and I’ll add you to my little black book.

Resistance to Reform: Status Quo Bias in the Presence of Individual- Specific Uncertainty
Author(s): Raquel Fernandez and Dani Rodrik
Source: The American Economic Review, Vol. 81, No. 5 (Dec., 1991), pp. 1146-1155
Published by: American Economic Association

Abstract

Why do governments so often fail to adopt policies which economists consider to be efficiency-enhancing? Our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform. We show that there is a bias towards the status quo (and hence against efficiency-enhancing reforms) whenever some of the individual gainers and losers from reform cannot be identified beforehand. There are reforms which, once adopted, will receive adequate political support but would have failed to carry the day ex ante. The argument does not rely on risk aversion, irrationality, or hysteresis due to sunk costs.

The full paper can be found on jstor (which requires a subscription for full-text) here.

One could of course engage with the debate as to whether any given set of reforms are in fact truly efficiency-enhancing, which is fairly core to the health care debate in the US, but it was striking that proponents of the measure were frustrated that some of the opposition to the Obama proposals came from those who the administration felt would directly benefit from it.
I guess the precise terms of the paper weren’t exactly anticipating that perceptions of reform proposals would change so quickly i.e., merely by the passage of a reform proposal, as opposed to its implementation, but the paper cited above was I think a wonderful working-through of the logic of some important messages to political reformers. It speaks, I think, to the need for policy advocacy to maximize credible information for citizens about the consequence of reform, and to the ultimate necessity for political leaders in a representative democracy to actually lead, and not merely regard themselves as uncritical conveyers of existing social preferences. More generally still, it’s a line of thought that speaks, I think, to the political possibilities of creating constituencies for reform over time. That’s especially important, I would suggest, in the midst of a crisis, when it’s tempting to imagine, for both citizens and politicians, that nothing can change for the better.

You can download the animation (a pdf file 226Kb) from
here.

You can view the file in your browser, and it can also be saved locally as a pdf file. The animation should work in recent versions of Acrobat Reader.

A number of basic features in the changing population structure emerge, I think, fairly readily from running the animation forward (maybe others will spot a lot more):

• Most obviously, overall population growth, as the pyramid takes more real estate on screen
• The missing young people in the 1950s and 1960s as the large numbers of young children don’t stay around long enough to be young adults/adults, so that the distribution is pinched.
• A bit of a reversal of that by the time the early 1970s come along as emigration decreases and indeed we experience net immigration (mainly returned migrants).
• The return of emgration in the 1980s, again reflected in the age structure as young people leave, and so e.g., the age group 15-19 doesn’t transition so readily into 20-24.
• A big impact on age groups 25+ from immigration post 2004 or so
• Absolute increases in older age groups (a percentage version of this graphic would probably work well to bring out proportions) and the systematically higher life expectancy of women at the upper age groups

In any event, a useful way of introducing some of the basic patterns in the data.