Quotulatiousness

March 24, 2013

The domestic economy of Cyprus is slowing to a stop

Filed under: Economics, Europe — Tags: , , , , — Nicholas @ 10:09

In the Telegraph, Colin Freeman looks at how the banking crisis is impacting ordinary Cypriots and retired EU citizens in Cyprus:

Last weekend, the small Mediterranean island was plunged into the epicentre of the eurozone crisis when Brussels finance chiefs, led by Germany, demanded a levy of up to ten per cent of savers’ deposits in return for a 10bn euro bail-out of the country’s ailing banks. The move left many of Cyprus’s 60,000-strong British community facing heavy losses on retirement nest eggs — and as the week rolled on, that looked like being just the least of their worries.

On Thursday, unhappy at the Cypriot parliament’s rejection of the deal, Europe’s Central Bank then threatened to cut financial life support for the island altogether, a move that would have led to its banking sector collapsing, and savers losing not just a percentage of their money, but all of it. It was only thanks to a last-minute agreement hammered out on Friday night, which is expected to restructure the country’s banks and restrict the levy to deposits of more than 100,000 euros, that all-out chaos was averted. For now, anyway.

[. . .]

Since last weekend, when all of Cyprus’s banks were shut to stop a run on withdrawals, work has ground to a halt, as the repair man has been unable to buy in the materials he needs from suppliers, who are all now demanding cash. The job symbolises the malaise of the wider Cypriot economy, built on shaky foundations, and now in a state of paralysis, with thousands of shops, businesses and restaurants unable to operate properly because of the financial uncertainty.

“None of my food and drink suppliers are taking bank payments any more,” said Yiota Vrasida, 43, who owns a café in the winding streets of the capital, Nicosia. “We can keep going until this weekend, but that is about it.”

[. . .]

“Nobody will want to leave so much as 10 euros in any Cypriot bank any more,” said Dino Karambalis, 49, an IT worker, standing at the end of a 30-people-long queue at the Laiki Bank, where he had 90,000 euros in savings. “They say this levy is only for Cyprus, but why should anyone believe that? This is undermining confidence in the euro as a whole, and in the whole EU project itself. I was pro-European before, but not now.”

This weekend, the Cypriot parliament sought to reassure smaller savers, saying those with less than 100,000 euros would face at most a levy of less than one percent. State television also talked of a one-time charge of up to 25 percent on savings of over 100,000 euros held at the Bank of Cyprus. With that in mind, capital controls will be imposed to stop a run on the banks when they reopen next week.

But whatever new measures come in, some damage has already been done by declaring savers’ accounts to be fair game in the first place. Britain’s Business Secretary, Vince Cable, warned on Friday that it could lead Northern Rock-style runs on banks all over the eurozone in future.

March 23, 2013

Human Achievement Hour 2013

Filed under: Economics, Environment, Liberty, Politics — Tags: , , , , — Nicholas @ 00:01

Oh, right. It’s once again time for the Gaia-worshippers to do an hour’s penance for the crime of being alive in an industrialized society. The Competitive Enterprise Institute proposes a different way of using that hour:

On Saturday, March 23 at 8:30pm (local time), some people, businesses and governments around the world will choose to sit in the dark for one hour as a symbolic gesture to take action against climate change. The organizers of Earth Hour say that they [no] longer expect energy use to actually drop during the hour, but instead see it as a way for people to show their commitment to reducing energy use and taking action beyond the hour.

It’s absolutely every person’s right to decide if they want to conserve energy for whatever reason; they are free to sit in the dark as long as they want. However, it should not be their right to impose their beliefs or opinions on others. And that is what is at the heart of the environmentalist movement. While many participants in Earth Hour sincerely want a cleaner environment — a desire most of us share — the environmentalist movement whether implicitly or explicitly seeks to clamp down on human progress by reducing energy consumption whether through regulation and taxation. They want to make fossil fuels, which they see as dirty, more expensive to encourage the use of renewable “greener” energies.

Despite any good intentions, the ultimate result of environmentalist policies is not a healthier, cleaner environment. Instead we will see a population that is sicker and poorer. The only way we achieve technology that is “greener” is by building on older “dirtier” technology. As we make it harder and more expensive for those in the business of creating new technologies, all we do is slow progress and make it that much longer to reach more environmentally friendly solutions.

March 22, 2013

Cyprus: the state of play on Friday

Filed under: Economics, Europe — Tags: , , , — Nicholas @ 08:35

In the Telegraph, Thomas Pascoe summarizes the situation in Cyprus as of Friday morning:

As it stands this morning, there is a Plan B on the table after parliament voted down the proposal that every bank deposit in the country be subject to a deduction. The new plan only affects those with deposits over €100,000; however, it will require those depositors to take a loss of up to 40pc. As part of this package, the nation’s two large banks will be saved. However, the structure of the deal requires that one of the pair, Laiki, will be split into “good” and “bad” banks, with large depositors left to chance it in the bad bank.

A word on the thinking behind it. While you and I perceive deposits as secure money (and I have argued that to touch them is an abuse of power), technocrats in Brussels take a different view. They tend to view deposits in the technical sense of being loans to banks. You give the bank your money in exchange for interest, and can call the loan at any time (provided not everyone else is doing the same thing, which is the situation now). The bank loans most of your deposit on again. When countries struggle with too much debt, those who have loaned them money get “haircuts”, or less back than they gave. Following this thinking, the EU’s argument is that if we lend money to failing banks, we too must take a haircut to keep them solvent.

[. . .]

So the compromise deal is an ugly one, involving a precedent (confiscation of deposits) which will cast a pallor over the entire European banking system. But the problems are equally great with any other solution. If the banks are left to fail, depositors lose everything except the scraps recovered by administrators. To argue that they, and the country, must be funded directly by the EU, requires the continued willingness of Germany to act against its own economic interests and support an entire continent on its shoulders, impossible without fiscal and political consolidation which no electorate would assent to at present (not that they are asked, usually).

In my opinion, there is no faster way to destroy confidence in your retail banking sector than stealing the money from depositors with no recourse. I have no idea why the European Union is so hell-bent on crushing the banks, but perhaps they have some looney-tunes notion that they can supplant the existing bank system with something directly operated by the ECB or the EU itself.

March 21, 2013

The choices for Cyprus don’t seem to include saving the banks

Filed under: Economics, Europe — Tags: , , , , — Nicholas @ 11:04

In Forbes, Tim Worstall sums up the real problem facing Cypriots:

There’s a very large portion of the European political elite who believe, take on faith (for there’s certainly no convincing real world evidence about it) that the creation of the euro is part of the inevitable creation of the European State. And as such it is entirely irreversible. It’s not just that people once in the euro shouldn’t leave it: it’s that it is simply inconceivable that anyone ever would leave it. Either wish to leave it or be allowed to leave it.

Wherein lies the danger to said European dreams and it’s tiny Cyprus that poses said danger.

As both Krugman and Yglesias point out, the Cypriot banking system is bust, gone. Even if it needn’t have happened this way having the system closed for at least a week is going to lead to bank runs when they finally reopen. The economy is most certainly going to stutter if not be deeply depressed as a result of that banking system going. Given that a substantial part of the economy is about offshore finance, and that that’s not going to survive the banking system crash, there will also, whatever else happens, be substantial declines in GDP.

It’s most certainly true that leaving the euro will cause all of those things to happen. But if they’re going to happen anyway then why not leave the euro? Why not bring back the Cyprus Pound? That is, do an Iceland?

[. . .]

But here’s the thing: there’s still that religious insistence among the federasts that the euro is irreversible, a part of the future of the politics and economy of the continent. And if Cyprus does leave and does recover without too much paid then what reason for Greece, or Spain, Portugal, to stay in? If going bust and going back to one’s own currency is, as Iceland showed (although they kept, rather than went back to), less painful that the austerity required to stay in the euro then, well, why stay in the euro?

“Henrich had thought he would be adding a small branch to an established tree of knowledge. It turned out he was sawing at the very trunk.”

Filed under: Americas, Economics, Science — Tags: , , , , — Nicholas @ 10:02

By way of Five Feet of Fury, an interesting story about challenging some very basic assumptions about psychology:

While the setting was fairly typical for an anthropologist, Henrich’s research was not. Rather than practice traditional ethnography, he decided to run a behavioral experiment that had been developed by economists. Henrich used a “game” — along the lines of the famous prisoner’s dilemma — to see whether isolated cultures shared with the West the same basic instinct for fairness. In doing so, Henrich expected to confirm one of the foundational assumptions underlying such experiments, and indeed underpinning the entire fields of economics and psychology: that humans all share the same cognitive machinery — the same evolved rational and psychological hardwiring.

[. . .]

When he began to run the game it became immediately clear that Machiguengan behavior was dramatically different from that of the average North American. To begin with, the offers from the first player were much lower. In addition, when on the receiving end of the game, the Machiguenga rarely refused even the lowest possible amount. “It just seemed ridiculous to the Machiguenga that you would reject an offer of free money,” says Henrich. “They just didn’t understand why anyone would sacrifice money to punish someone who had the good luck of getting to play the other role in the game.”

The potential implications of the unexpected results were quickly apparent to Henrich. He knew that a vast amount of scholarly literature in the social sciences — particularly in economics and psychology — relied on the ultimatum game and similar experiments. At the heart of most of that research was the implicit assumption that the results revealed evolved psychological traits common to all humans, never mind that the test subjects were nearly always from the industrialized West. Henrich realized that if the Machiguenga results stood up, and if similar differences could be measured across other populations, this assumption of universality would have to be challenged.

Henrich had thought he would be adding a small branch to an established tree of knowledge. It turned out he was sawing at the very trunk. He began to wonder: What other certainties about “human nature” in social science research would need to be reconsidered when tested across diverse populations?

A notion that’s popped up several times in the last couple of months is that the easy access to willing test subjects (university students) introduces a strong bias to a lot of the tests, yet until recently the majority of studies disregarded the possibility that their test results were unrepresentative of the general population.

March 20, 2013

Paul Wells says Harper and Flaherty have learned a lot about budgeting

Filed under: Cancon, Economics, Government — Tags: , , — Nicholas @ 10:26

Of course, this isn’t necessarily a good thing:

One thing Stephen Harper learned soon after he became Prime Minister was that Canadians have little intuitive grasp of decimal places. A government does not get 1,000 times more credit for spending $1 billion on something than it does for spending $1 million. In fact, it does not get twice as much credit. As long as the government notices a problem and nods at it, it wins approval from voters who care about that problem. So not long after his man Jim Flaherty started delivering budgets, a Harper era of small and essentially symbolic investment began.

Similarly, the ability to tell the difference between a little belt-tightening and a wholesale cut to a government service or department is not a widespread skill. So as long as the government offers only the vaguest information about its spending cuts, few Canadians will go searching for details.

This general numerical dyslexia will come in handy this year more than most, as Jim Flaherty tries to meet a zero-deficit target that is suddenly rather close — 2015, give or take — while dealing with a lousy economy.

How Buildings Learn

Filed under: Architecture, Economics, History — Tags: , — Nicholas @ 00:02

H/T to Tim Harford for the link.

March 19, 2013

Sifting through the 3D printing hype

Filed under: Economics, Media, Technology — Tags: , , , — Nicholas @ 09:06

At The Register, Professor James Woudhuysen looks at the gap between the breathless hype about 3D printing and the current and near-term technological, political, and legal limitations:

3D printing, otherwise known as additive manufacturing, is a subject that pumps out enthusiasts faster than any real-life 3D printer can churn out products.

In conventional machining, computer-aided design and computer-aided manufacturing (CADCAM) combine to make products or parts of products by cutting away at, drilling and otherwise manhandling materials. With 3D printing, CADCAM works with product scanners, other bits of IT and special plastics and metals to build products up, whether through the squirts of an inkjet-like device or the sintering of metal powder by lasers or electron beams.

Rather in the same way, America’s somewhat self-conscious Maker Movement — several thousand DIY fans out to revive manufacturing through the web and from the privacy of their own garages — promotes 3D printing with layer upon layer of hype.

It’s true that 3D printing has its good points. Without having to engage in expensive retooling, a 3D printer can easily be reprogrammed to make variations on a basic product — good for dental crowns, for example. 3D printing can also make intricate products with designs that cannot be emulated by conventional, “subtractive” techniques.

[. . .]

Despite all this, those who blithely proclaim that 3D printing brings a revolution to manufacturing make a mistake. 3D printing does not represent a pervasive, durable and penetrating transformation of the dynamics and status of manufacturing. Nor, as The Economist newspaper has proposed, is its emergence akin to the birth of the printing press (1450), the steam engine (1750) or the transistor (1950). There is much to celebrate about 3D printing, and even its too-fervent advocates at least represent a reasonable desire to produce new kinds of things in new kinds of ways. Yet what characterises 3D printing is how, as with other powerful technologies today, it need only barely arrive on the world economic stage for zealots to overrate it, and for others to turn it into an object of fear.

March 18, 2013

Cyprus to offer small depositors a slightly less nasty haircut

Filed under: Economics, Europe — Tags: , , — Nicholas @ 10:05

Megan McArdle on the most recent “concession” by the Cypriot bank regulators:

Cyprus seems to have realized what I wrote yesterday: violating your deposit insurance guarantees is a better way to start a bank run than to stabilize a banking crisis. After Cypriots rushed to withdraw their money ahead of the new rules, the Wall Street Journal reports that the government has cobbled together a new proposal: small depositors will pay a 3% “tax” on their accounts (instead of 6.75%); medium depositors (those with between €100,000 and €500,000 will be taxed at the same 10% they were supposed to pay before; and those with more than €500,000 will pay 15%.

That may check the runs on the small accounts. Now the question is: what about the big ones? Will the foreign depositors view 15% as the simple cost of stashing their money out of the watchful eye of their own government? Or will they seek a new haven?

If the foreign money runs, it seems unlikely that Cyprus will be able to bail out the banks again; this desperate bank levy is, after all, what they were forced to do just to raise the $5.8 billion that the EU and the IMF demanded they contribute to the bank rescue. But the higher Cyprus raises the levy on large accounts, the more likely it is that the foreign money will flee to somewhere less shaky.

By “less shaky”, one has to assume a non-European bank…

Update: Cyprus has extended the “bank holiday” to Thursday.

Will the Cyprus bailout set the fuse to a new Great Depression?

Filed under: Economics, Europe, History — Tags: , , , — Nicholas @ 00:01

History may not repeat itself, but it’s quite likely that it paraphrases itself instead:

So, this is going to be a very sour reading of what has happened in Cyprus this weekend. It will also be a very partisan one, possibly even a partial one. But if Milton Friedman and Anna Schwartz were right in their insistence that it was actually the Federal Reserve that caused the Great Depression (which is something that Ben Bernanke himself has insisted that the Fed will not repeat) then one way of interpreting what has happened is that the European Central Bank has just set us all up for another Depression. The trigger is that “tax” of a little over 6% on all depositors.

This isn’t an analysis that you’ll be able to get all economists to sign up to. But the basic story told by Friedman and Schwartz in A Monetary History of the United States was that the 1929 crash was indeed a serious crash. But it would not have led to the Great Depression without the Federal Reserve making some serious mistakes. Two of which were to allow the intertwined collapses of both the money supply and the banking system. Given that it is the banks that create credit and thus the wider money supply they are, to a great extent, the same thing.

[. . .]

But please note the central part of Friedman’s argument. Yes, there was the crash. Yes, there would have been a deep and painful recession as a result. But the tipping of that recession into depression was a result of the cascading series of bank failures in the absence of deposit insurance: that led to the calamitous shrinking of credit and the money supply.

So let us now look at Europe and the eurozone. Certainly there’s been a crash (or even a Crash). We’ve so far avoided the depression part (although not everywhere. Greece is certainly in one, Spain possibly and looking out my window at rural Portugal I see certain signs of a reversion to a non-cash economy.) but the important question is whether we manage to continue to do so?

[. . .]

Yes, I do know, they’ve called it a tax: but here we’ve got to make reference to that duck thing. The difference between a 6% or more “tax” on your bank deposit and a failure of the previously agreed deposit insurance to protect your deposit is quackery enough that it’s a duck.

As I’ve said before the importance of this is moot at present. It depends on who believes what. If the citizenry believe that they don’t have deposit insurance any more (whether we call this a tax or a duck) then we will see more mass withdrawals from banks and we will see more bank failures. And cascading bank failures are exactly the thing that will tumble us into a new depression.

March 17, 2013

Cyprus delays emergency parliamentary session over banking haircut

Filed under: Economics, Europe, Government — Tags: , , — Nicholas @ 09:50

Apparently not all the politicians in the Cypriot parliament are on-board with the mandatory levy on savings accounts:

Cyprus’s parliament has postponed until Monday an emergency session to vote on a levy on bank deposits after signs that lawmakers might block the surprise move agreed in Brussels to help fund a bailout and avert national bankruptcy.

In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit up to 9.9 percent of their deposits in return for a 10 billion euro ($13 billion) bailout to the island, which has been financially crippled by its exposure to neighboring Greece.

The decision, announced on Saturday morning, stunned Cypriots and caused a run on cashpoints, most of which were depleted within hours. Electronic transfers were stopped.

[. . .]

Many Cypriots, having contributed to bailouts for Ireland, Portugal and Greece — Greece’s second bailout contributed to a debt restructuring that blew the 4.5 billion euro hole in Cyprus’s banking sector — are aghast at Europe’s treatment.

Cyprus received a “stab in the back” by its EU partners, the daily Phileleftheros said.

But it and another newspapers highlighted the danger of plunging the banking system into further turmoil if lawmakers sat on the fence.

March 16, 2013

More on the Cyprus banking situation

Filed under: Business, Economics, Europe — Tags: , , , , — Nicholas @ 11:44

At Forbes, Tim Worstall explains why the mandatory levy on bank accounts is an epic facepalm:

There’s nothing particularly bad about making depositors carry some of the load of a bank failure. Indeed, it has something to recommend it: if it happens occasionally then people will take more care over where they put their money and what the banks do with it.

However, there’s a very great difference between allowing depositors without government insurance to take losses and actually reneging on the previously promised government insurance. And it’s that second that they’re actually doing here. [. . .]

Under the system until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn and governmental promise has been shown to be false. And not even the European Union nor the European Central Bank are going to make them stick to it. Indeed, very much the other way around. The EU and ECB are insisting that the Cyprus authorities breach this deposit insurance provision.

As I say, there’s nothing wrong with making uninsured depositors take some of the pain. Certainly nothing at all wrong with making those with large deposits take a haircut. The problem is when government has said “we’ll insure this” and when push comes to shove they say “err, no, we won’t”. And the problem with this is that it makes all future EU deposit insurance worth that much less.

The Cyprus “rescue” includes nasty haircut for savings held in consumer banks

Filed under: Economics, Europe — Tags: , , , , — Nicholas @ 11:23

The BBC reports on the way Cypriot bank accounts are being levied as part of the “rescue”:

Cyprus may be one of the eurozone’s tiniest economies — its third smallest — but for the next 48 hours or so, it may be the single currency area’s most important.

The point is that there could be serious repercussions for other financially over-stretched economies, such as Spain’s and Italy’s, from the nature of Cyprus’s 10bn-euro (£8.7bn) bailout — which includes, for the first time in any eurozone rescue, losses imposed directly on depositors in banks.

These losses, running to almost 6bn euros, stem from an emergency levy of 9.9% on bank deposits over 100,000 euros (£86,600) and 6.75% below that.

The levy serves as a caution to lenders to banks that they should take care where they place their funds and avoid banks which overstretch themselves — as Cypriot banks did.

But precisely the same arguments — for what is known as a “bail-in” by private-sector creditors — were put by liberal-market purists at the peak of the banking crises in Ireland and Spain.

In the end, eurozone governments were terrified that if lenders to Spanish and Irish banks were punished, there would be a devastating domino effect of withdrawals of funds from banks in other weaker economies — a domino effect that would jeopardise the survival of the eurozone.

So, reckless lenders to Spanish and Irish banks were not punished.

There’s a strong possibility that savers in other European countries with weakened banking systems to draw the correct conclusion quickly … and start pulling their money out of the banking system. And also expect the EU to react with draconian currency restrictions. It’s a potential banking sauve qui peut.

March 12, 2013

If consumers were 10% better off … why did they call it a “disease”?

Filed under: Cancon, Economics, Media — Tags: , , , — Nicholas @ 09:23

In Maclean’s, Stephen Gordon illustrates the classic case of burying the lede for popular economics:

    So Dutch consumers are roughly 10% better off than they would have been, but companies have been able to compete only by paring their profit margins.

    “The Dutch disease,” The Economist, November 26, 1977

Talk about burying the lede. That sentence appears at the end of the 10th paragraph of the much-referred-to but rarely read article in The Economist that coined the phrase “Dutch Disease.” In the normal course of things, a 10 per cent increase in consumers’ purchasing power would be the stuff of banner headlines, but, for some reason, The Economist chose to hide that point deep into the story and qualify it with a caveat about how hard it had become for companies to compete. (The answer to that, by the way, is: “So what if producers are struggling?” What really matters is consumer welfare.)

My take on the Dutch Disease debate can be summed up as follows: Why are we calling it a disease?

March 6, 2013

QotD: Canada Syndrome

Filed under: Cancon, Economics, Quotations — Tags: , , , , — Nicholas @ 00:02

It’s one of the marvels of the Canadian electorate. Show Canadians a special interest group that uses its government-granted privileges to fleece consumers, and they’ll embrace it as a “national champion,” a “uniquely Canadian way of life” or some equally vapid catch-phrase.

This is from the Wikipedia entry for Stockholm Syndrome:

    Stockholm syndrome, or capture–bonding, is a psychological phenomenon in which hostages express empathy and sympathy and have positive feelings toward their captors, sometimes to the point of defending them.

What we suffer from is the economic policy equivalent. Call it “Canada Syndrome”: a tendency for consumers to identify with the producer interests that are holding them hostage.

Stephen F. Gordon, “Our Stockholm Syndrome about supply management”, Maclean’s, 2013-03-05

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