An Boilgeog April 22 2009 Michael O’Sullivan Author of ‘Ireland and the Global Question’ (Cork University Press, 2006) Phone: +44 20 7883 8228 Email: michael.o’firstname.lastname@example.org
Ireland and the Credit Crisis <ul><li>The Credit Crisis </li></ul><ul><li>‘ An Boilgeog’ </li></ul><ul><li>What did we do well first time? </li></ul><ul><li>A Coming of Age, or plain disaster </li></ul><ul><li>The World post the Credit Crisis </li></ul><ul><li>What problems do we face today? </li></ul><ul><li>What to do? </li></ul><ul><li>The Second Republic </li></ul>
We will never learn from bubbles MacKay, C., Extraordinary Popular Delusions and the Madness of Crowds, 1841 Source: Prof Larry Neal.
Bubbles - UK Railway share index, 1845-1849 Source: Global Financial Data Source: Global Data Inc.
This one was extraordinary in size and interdependence Source: Federal Reserve, The Statistical History of the US, Morgan Stanley, Credit Suisse Last data point: Q3 2008
Where are we now? - US payrolls peak to trough Source: Bloomberg, Credit Suisse Last data point: February 2008
Global IP Contraction vs. Major US Contractions Credit Suisse; the BLOOMBERG PROFESSIONAL™ service; DataStream
Length of US recessions Source: Datastream, National Bureau of Economic Research, Credit Suisse
IMF on Crashes and Bubbles <ul><li>Recessions associated with crunches and busts tend to be longer and deeper </li></ul><ul><li>Credit crunches and asset busts are associated with substantial declines in credit and asset prices </li></ul><ul><li>While output can recover during a credit crunch or housing bust, (residential) investment drops significantly. </li></ul><ul><li>In these cases aggressive monetary policy is normal (Ireland has the opposite), and higher govt consumption. </li></ul>From Claessens, S., Kose, M.A.& Terrones, M.E., ‘What Happens during Recessions, Crunches and Busts?, IMF Research Paper
Pain is where the leverage is Source: Bloomberg, Credit Suisse / IDC House price to income, rel. to long-term averages
What did we do right? <ul><li>Is Ireland still an example to follow? – ‘From Phoenix to Tiger’ </li></ul><ul><li>Success based on a stew of international and domestic factors </li></ul><ul><li>Domestic – Intangible Infrastructure – technology, rule of law, education, finance, business climate, institutions. </li></ul><ul><li>But we failed the ‘Global Question’ – strategic thinking about the influence of global factors on a small country </li></ul><ul><li>We are now finely balanced between a ‘Coming of Age’ and a prolonged structural decline </li></ul>
New Economies (USA in 19 th & 21 st century) driven by innovation Source: US Patent and Trademark Office, US Census Bureau Toward a real ‘growth’ model – intangible infrastructure
World post the Credit Crisis <ul><li>What will replace the ‘Anglo-Saxon’ model? </li></ul><ul><li>Investment world will be less leveraged, more risk averse, simpler, lower earnings growth </li></ul><ul><li>Emerging markets continue to ‘grow up’ </li></ul><ul><li>Some developed world countries could go the way of Uruguay and Argentina 100 years ago </li></ul><ul><li>We have yet to see the full economic, social and political effects of the crisis. </li></ul>
The World Economy – EM’s look to regain former glory Source: Angus Maddison, IMF, Credit Suisse Share of Global GDP (%) Years: 1700, 1820, 1890, 1952, 2007, 2030F Note: 2007 figures at current exchange rates
EM‘s have rebuilt their balance sheets post 1998 Source: Bloomberg, Credit Suisse Emerging Market countries have learnt the lessons of 1998 and have built currency reserves – spawning SWF‘s
China buys more cars than the US now Note: China’s January automobile sales is estimated to be 790,000 Sources: CEIC , Bloomberg, Credit Suisse
Lessons so far for academia <ul><li>More ‘joined up’ analysis – i.e. Development Economics </li></ul><ul><li>Literature on institutions is important (e.g .Acemoglu) </li></ul><ul><li>Macro/Central Banking – focus on bubbles, coordinate monetary and fiscal policy, back to basic for Fed model (1911-1913). </li></ul><ul><li>Behavioural finance to become more widely accepted (e.g. Shiller, Thaler) </li></ul><ul><li>Corporate governance (e.g. Shleifer & Vishny) literature becomes important again – family influenced businesses. </li></ul><ul><li>Maths based rational modelling less important </li></ul>
What problems do we face in Ireland? <ul><li>Still in shock, with little awe </li></ul><ul><li>Policy makers and politicians very poorly equipped to deal with this </li></ul><ul><li>Consumer prices and property prices need to correct much further </li></ul><ul><li>Competitiveness </li></ul><ul><li>Key issue is not the next ten months but the next ten years – where will the growth come from? </li></ul>
Government rescue plans: credit risk transfer from banks to sovereigns Source: Bloomberg, Credit Suisse
Source: Economist, FT Prices (e.g. labour) are still too high (leaders salaries in euros)
Ireland’s economy: What to do? <ul><li>Don’t fight the bubble - look to next ten years, not ten months </li></ul><ul><li>Rediscover competitiveness, break domestic industrial structures down. </li></ul><ul><li>Focus intensely on Intangible Infrastructure </li></ul><ul><li>Solve the under investment puzzle </li></ul><ul><li>Nurture domestic companies in higher growth industries </li></ul><ul><li>Micro-economic policy innovation to counter lack of macro sovereignty. </li></ul>
The Bigger Picture – ‘The Second Republic’ (IT, 14/04/2008) <ul><li>Smaller, better quality Dail – focus on strategy less tactics </li></ul><ul><li>Elevate councils to provincial level </li></ul><ul><li>Rediscover competitiveness, break domestic industrials structures down. </li></ul><ul><li>Focus intensely on Intangible Infrastructure </li></ul><ul><li>Technocracy, Grand Ecoles </li></ul><ul><li>Enlist outside help (i.e .OECD, ECB, BIS) in building new institutions </li></ul>
Global Disclaimer / Important Information For further information, including disclosures with respect to any other issuers, please refer to the Credit Suisse Global Research Disclosure site at: https://www.credit-suisse.com/research/disclaimer The information and opinions expressed in this report were produced by the Global Research department of the Private Banking division at Credit Suisse as of the date of writing and are subject to change without notice. Views expressed in respect of a particular stock in this report may be different from, or inconsistent with, the observations and views of the Credit Suisse Research department of Investment Banking division due to the differences in evaluation criteria. The report is published solely for information purposes and does not constitute an offer or an invitation by, or on behalf of, Credit Suisse to buy or sell any securities or related financial instruments or to participate in any particular trading strategy in any jurisdiction. It has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Although the information has been obtained from and is based upon sources that Credit Suisse believes to be reliable, no representation is made that the information is accurate or complete. Credit Suisse does not accept liability for any loss arising from the use of this report. The price and value of investments mentioned and any income that might accrue may fluctuate and may rise or fall. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to individual circumstances, or otherwise constitutes a personal recommendation to any specific investor. Any reference to past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any products mentioned in this document. Alternative investments, derivative or structured products are complex instruments, typically involve a high degree of risk and are intended for sale only to investors who are capable of understanding and assuming all the risks involved. Investments in emerging markets are speculative and considerably more volatile than investments in established markets. Risks include but are not necessarily limited to: political risks; economic risks; credit risks; currency risks; and market risks. An investment in the funds described in this document should be made only after careful study of the most recent prospectus and other fund information and basic legal information contained therein. Prospectuses and other fund information may be obtained from the fund management companies and/or from their agents. Before entering into any transaction, investors should consider the suitability of the transaction to individual circumstances and objectives. Credit Suisse recommends that investors independently assess, with a professional financial advisor, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences. A Credit Suisse company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the securities referred to herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or options thereof.
‘ Helicopter Ben’ <ul><li>Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002 Deflation: Making Sure "It" Doesn't Happen Here </li></ul><ul><li>‘ The best way to get out of trouble is not to get into it in the first place’ </li></ul><ul><li>‘ Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply’ </li></ul><ul><li>‘ Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys’ </li></ul><ul><li>‘ A sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities’ </li></ul><ul><li>‘ In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities’. </li></ul>Source: Board of Governors of Federal Reserve