Why removing the state guarantee is a bad idea

I was really disappointed to hear that Jack O’Connor of SIPTU and Sean Sherlock of the Labour party had brought the idea of ‘removing the state guarantee’ into the public arena regarding PTsb in retaliation to their 0.5% hike in the variable rate they are charging their customers. The outcome from a removal of a state guarantee could be catastrophic and in this post we hope to demonstrate this.

Before that though, it is vital to remember that there is no ‘price promise’ with a variable rate, the margin is not tied to the ECB – a mistake many borrowers made when expecting rate cuts as the ECB lowered the base. The margin on a standard variable rate is determined by the lender so this is case of the bank doing what it is entitled to do, they didn’t break tracker agreements or any loans that didn’t implicitly allow it, so on one hand the bank is acting within its rights.

The other thing to remember is the contradiction …

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IMF Report on Ireland, condensed.

The IMF released their report on Ireland yesterday, here are some of the bullet points of the report.

Executive summary:

Given our serious imbalances Ireland was especially vulnerable to the recent global shocks. Specifically, over reliance on construction, financial intermediation, and this was coupled with a loss of competitiveness. Our expected drop cumulative drop in GDP of 13.5% to 2010 is the largest amongst advanced economies. The decline in wages will need to be sustained to help redress our cost disadvantage. Rapid progress on bank restructuring is critical. Authorities have taken important steps towards stabilization through the blanket guarantee. ECB is providing vital liquidity. NAMA is potentially the right mechanism, but it requires realistic assessments. Fiscal consolidation has begun and must be sustained. A continued commitment is required to address sensitive expenditures including the public wage bill and the scope of social welfare programmes.

1. The Context

The problems in Ireland reflect the unwinding of critical imbalances, easy credit fostered a property bubble, bank exposure to property soared as did the use …

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The tax of Regulation

It is worth noting that the constant calls for ‘Regulation’ are partly flawed, on one hand we do need more regulation, such as regulation of our Government agencies who can’t control their spending, regulation and accountability of our regulator, and of course (most importantly), some regulation of central banks who’s ability to keep rates too low and aid in the creation of money is closely linked with every major boom/bust in the last 100 years.

However, further regulation on financial services companies, and in particular small financial companies is not going to achieve the very aim it sets out to do, namely that of protecting consumers. It would be far better to have an ombudsman and regulator with teeth than to look for more laws that can be broken without retribution [in this respect banks have broken strict rules with almost total impunity].

Financial services are also a zero VAT business, this means that while we pay 21.5% VAT for everything we receive, we cannot charge VAT to our clients, thus, all of our …

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Living in the past, Irish property prices.

Paul O’Connor of MyHat.ie and PropertyWeek.ie has written up a great post on the Irish property market, the single biggest hindrance in the Irish property market is that of it being totally non-transparent when it comes to sales prices, most of us would settle for some opacity but alas, even that is too much to ask for.

Here is Paul’s Take on it:

An auction is a sale conducted in public. As such, prices paid at auction have always been available to the general public, and until auctions themselves became a victim of the market crash, we had become used to seeing auction results reported every week in the property pages of the newspapers.

In contrast, a private treaty sale is conducted in private. It does not specifically imply price secrecy, just that you can negotiate a deal at your own pace …

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Alan Blinder talks to Charlie Rose

I know on the last post with Charlie Rose I said ‘this is a must see’ but cancel that, this one is the must see of the day!

This is a conversation about the growing fiscal deficit with Alan Blinder, Professor of Economics at Princeton University and Director of Princeton’s Center for Economic Policy Studies, David Leonhardt of “The New York Times” and Alan J. Auerbach, Professor of Economics and Law, Director of the Burch Center for Tax Policy and Public Finance, University of California, Berkeley

Alan Blinder of Princeton is a brilliant economist with both academic and practitioner experience, I always find his views really interesting.

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Financial Fragility and Corporate Governance in Ireland today

This is footage of a talk given by Prof. Stephen Kinsella of the Kemmy Business School in University of Limerick, about his thoughts on regulation, corporate governance, and the Minsky Hypothesis.

You can watch the whole playlist here. Or go to the Irish CFA channel on youtube and check out the follow on videos, there are six in total, the questions and answer section is particularly interesting to anybody who may have an interest in financial regulation and some of the pitfalls of it, Stephens thoughts are quite refreshing to the normal solutions you’ll hear (although I don’t agree with them all!).

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