Yesterday I argued that Irish austerity doesn't really tell us much about what the US should do. Today it's worth talking about why, exactly, the Irish experience is such a poor model for the problems of the US. Luckily, fledgling think tank e21 has done the hardest part of the job for me: explaining the depth of the problems that Ireland faces.
For the U.S., there was never any question about whether the federal government had the capacity to arrest the panic. At its peak, the liabilities of the U.S. financial system were $17.1 trillion (D.3), or about 118% of GDP. Even if one assumed that assets were worth 20% less than liabilities - a highly aggressive and unlikely assumption - the cost of guaranteeing all of the financial system's liabilities would only be 23% of GDP, or equal to a one-time 50% increase in the debt-to-GDP ratio. Therefore, the implied guarantee of all financial system liabilities after TARP was highly credible.
For other countries with larger (relative) financial sectors, the arithmetic was much different. The most obvious example was Iceland, whose banking system's liabilities reached nearly 1,100% of GDP in 2007. When its banks could not access wholesale funding markets, the government lacked the fiscal capacity to intervene credibly. The result was economic collapse. For other nations, it was less cut and dry whether the government could backstop its banking system's liabilities without incident (see chart above). The United Kingdom and Switzerland's banking system liabilities exceeded 400% of GDP. Both nations took actions to recapitalize banks and provide implicit guarantees of their liabilities - TARP-like programs to stand behind banks and assuage concerns of creditors without legally obligating the government to ensure no bank creditor suffered any loss. Conversely, Ireland, whose banking system's liabilities were also near 400% of GDP, decided to formally guarantee its banking system's liabilities.
While the Swiss and UK guarantees seem to have succeeded thanks to their banking system's international activity and broad diversification, the Irish guarantee has not been as successful, largely because of its banks concentrated exposure to a bursting domestic real estate bubble. The result has been a deeply insolvent banking system that some believe will ultimately push the Irish government itself bankruptcy. Barclays was the latest to warn that the government will likely have to renege on its guarantee and seek concessions from bank creditors if it is to avoid sovereign bankruptcy. As of August, the Irish banking system owed €95 billion to the European Central Bank (ECB), which means about 12% of all Irish bank assets are now financed through official liquidity facilities. This is only slightly below the 17% of Greek assets funded through official channels and a sign that the private sector is no longer willing to fund Irish banks.
The problem for Ireland is that the tax revenue that could otherwise be pledged to cover its banks' debts has plunged for the same reason its banks are in such trouble: the collapse of the real estate bubble. Irish house prices have fallen by 34% from the peak and have yet to stabilize. Irish wealth fell by about €150 billion in 2009, which would be roughly equivalent to an $8 trillion decline for U.S. households. Unemployment has spiked in the very sectors most responsible for growth in the recent past - real estate construction and finance. The same factors driving the banks' insolvency are simultaneously depressing employment, household spending, and tax revenue. The deficit stands at 14% of GDP, due largely to an economic contraction that sliced 10% off of the size of the Irish economy since 2008. The government's gross debt has nearly tripled as a share of GDP, rising from 25.8% in 2006 to 64% at the end of last year and could exceed 75% by the end of the fiscal year.
There are no signs that any of this is temporary or that adjustments made to date are sufficient to maintain access to credit. The initial austerity measures taken by the Irish government - tax increases and large cuts to public employee wages - seemed ambitious, but they turned out to be a drop in the bucket relative to the cost of the bank rescue. The Irish government created the National Asset Management Agency (NAMA) to acquire property development and commercial real estate assets from banks at a sizeable discount to par. As with similar schemes, this government-sponsored fund faces a catch-22: overpay for assets and transfer losses directly to taxpayers or drive a tough bargain and further expose the banks' insolvency. To date, NAMA has recorded €30 billion of losses, or more than 10% of GDP. S&P estimates that ultimate losses will be between 29% and 32% of GDP. To put this figure in perspective, this would be equivalent to U.S. taxpayer losses on Fannie Mae and Freddie Mac of $4.2 trillion, or about 11-times the CBO estimate of $380 billion.
While some think Ireland could be saved through export growth given the number of international corporations that moved to Ireland to take advantage of the low corporate tax rate, the potential for export growth is limited by what the IMF suggests was a bubble in wages similar to the one in property prices. At the end of 2007, Ireland was proudly boasting that it had more Mercedes Benz per capita than Germany. The rise in wages brought about by a booming economy reduced competitiveness. Deflation has set in with prices falling by nearly 2% last year. Export growth will likely first require a period of prolonged deflation, which would result in a dramatic increase in the real cost of the large amounts of newly incurred debt. In short, the Irish economy is still reeling from a financial collapse that is several times worse than that of the U.S. Even the Spanish problems are mild by comparison, as only 4% of Spanish banking system assets are funded by the ECB and Spanish banks are more diversified and better capitalized.
Using Irish austerity as a dire warning to us relies on what I think are oversimplified comparisons. Folks point out that despite austerity, Ireland's tax revenues have collapsed, and their debt is trading at a huge premium to Germany's--much bigger than the premium paid by Spain, which hasn't tried such draconian measures. But Ireland's problems are really rather special. For various reasons, including favorable corporate tax rates and an educated, English-speaking population, capital poured into the country for more than a decade, leading to a banking sector that was grossly inflated compared to the underlying economy. The US banking sector is rather tame by comparison to most European nations--bank leverage at the beginning of the crisis was about equal to GDP, rather than the three to five times GDP found in many European nations. But Ireland is almost in a class by itself.
That meant that when the financial crisis hit, Ireland's contraction was much worse--and much less amenable to government interventions that worked in other countries. It's not surprising that their fiscal crisis is dire, their credit spreads rising.
In order to say that Irish austerity offers a grim lesson for us, you need to know the counterfactual: how bad would growth, tax revenues, credit spreads have been without the austerity? And because of the magnitude of their problems, it is far from clear that austerity has made things worse.
Now, even if austerity had made things better, that wouldn't necessarily be a guide for US policy--again, because their crisis is so much deeper. Attempting to borrow and spend their way out of the crisis might have led to total collapse, but that wouldn't mean that it would have the same effect here, where our fiscal issues are more manageable.
That's why I think it's just not useful to bring it up in the context of the American debate.
The 49ers quarterback won’t stand for the national anthem anymore.
San Francisco 49ers quarterback Colin Kaepernick’s refusal to stand for the national anthem before games as a protest against recent high-profile incidents of police brutality and racial injustice have been met with criticism and protests, but is an important step for a league where professional athletes rarely speak out on such issues.
Kaepernick was noticed sitting down during the playing of “The Star Spangled Banner” in a preseason game Friday. When asked by a reporter about his actions, he said:
I am not going to stand up to show pride in a flag for a country that oppresses black people and people of color. To me, this is bigger than football and it would be selfish on my part to look the other way. There are bodies in the street and people getting paid leave and getting away with murder.
What looks at first glance like an opening up of possibilities is actually an attack on the human imagination.
You might not like what I’m about to say about the multiverse. But don’t worry; you’ve already had your revenge. If there are an infinite number of parallel universes, there will be any number of terrible dictatorships, places where life has become very difficult for people who like to string words together. Somewhere out there, there’s a society in which every desperate little essay like this one comes with a tiny, unremarkable button: push it, and the author will be immediately electrocuted to death.
Maybe your hate is more visceral—you already know I’ll die some day, but you want to see it happen; you need to see me groveling. You can if you want. Fly upwards from the plane of our solar system, keep on going, through the endless huddles of galaxies, never forgetting your purpose, until space and time run out altogether. Eventually you’ll find yourself in another universe, on a damp patch of grass and broken concrete, unwatched by whatever local gang or galactic empire rules the city rising in foggy shapes beyond the marshes. There, you’ll see a creature strangely similar to yourself, beating me to death with whatever bits of scrap are lying around.
As pay TV slowly declines, cable news faces a demographic cliff. And nobody has further to fall than the merchant of right-wing outrage.
Updated at 12:05 p.m.
October 7, 2016, will be the 20th birthday of the Fox News Channel, and at the moment, the network is experiencing the soap-operatic highs and lows typical of any teenager on television. In many ways, the summer of 2016 may go down in Fox News history as the company’s nadir. Its founder and leader Roger Ailes has been dishonorably dispatched, the remaining executives are dealing with a flurry of sexual harassment lawsuits, and one of its most public faces, Sean Hannity, has ignominiously remodeled himself as a gutless Trump whisperer.
And yet Fox News’ fortunes are ascendant, at least in the most quantifiable sense. The network’s annual profit in 2015 soared by about 20 percent. For the first time ever, Fox News has been the most-watched cable network among both primetime and daytime viewers for several months, with a larger audience than its nominal rivals, CNN and MSNBC, combined. Led by “The O'Reilly Factor,” Fox News doesn’t just have the best-rated news show on cable television; according to The Wrap, it has the 13 best-rated news shows on cable television.
A new anatomical understanding of how movement controls the body’s stress response system
Elite tennis players have an uncanny ability to clear their heads after making errors. They constantly move on and start fresh for the next point. They can’t afford to dwell on mistakes.
Peter Strick is not a professional tennis player. He’s a distinguished professor and chair of the department of neurobiology at the University of Pittsburgh Brain Institute. He’s the sort of person to dwell on mistakes, however small.
“My kids would tell me, dad, you ought to take up pilates. Do some yoga,” he said. “But I’d say, as far as I’m concerned, there's no scientific evidence that this is going to help me.”
Still, the meticulous skeptic espoused more of a tennis approach to dealing with stressful situations: Just teach yourself to move on. Of course there is evidence that ties practicing yoga to good health, but not the sort that convinced Strick. Studies show correlations between the two, but he needed a physiological mechanism to explain the relationship. Vague conjecture that yoga “decreases stress” wasn’t sufficient. How? Simply by distracting the mind?
Why did the company trend a false article about Megyn Kelly?
Oh, Facebook. Just when the company seems to have avoided the responsibility of being a news organization (and all the attendant controversy), it finds itself back in the editorial muck.
Last week, Facebook made a surprise overhaul of its “Trending Stories” feature, the sidebar that highlights some of the most popular news stories on Facebook. Where the company had previously provided a short, human-written summary of the news at hand, it now only described the story in a one or two-word phrase: “#Toyko2020: Japanese Prime Minister Appears in Surprise Performance During Rio Ceremony,” became just “#Tokyo2020.”
Facebook’s decision to simplify the feature seemed like an attempt to wriggle out of editorial responsibility: What had been a messy human-led process would now become an algorithm-guided one. The company also laid off the 26 employees who had run the feature—19 curators and seven copyeditors—with little warning on Friday, according to Quartz.
Hillary Clinton has her problems, but Donald Trump is unfit for the presidency.
On one hand, there’s former Secretary of State Hillary Clinton, who oversaw “grossly inadequate” security at a diplomatic facility in Benghazi, Libya, the site of a deadly September 11, 2012, terrorist attack.
What to do if you’re a Hillary fan seated next to a Trump supporter at a wedding
When America is finally great again, they’ll make the latte with soy milk like you asked.
All those political cracks, not to mention earnest proclamations, mean that for the next 10 weeks, many casual interactions run the risk of erupting into full-blown partisan warfare. It’s more of a danger for those with family members or close friends who support opposing candidates and views. But on Facebook, hot-button scuffles can break out between almost anyone. (I recently witnessed a college friend who lives in Europe arguing about gun rights with a random guy from my high school in Texas, whom I myself have spoken with only a few times in person.)
One reason Americans find the other side’s views so inflammatory is that increasingly, they view their political party as more of a tribe than a checkbox. “People start seeing themselves or their political views as the main representation of their values, and what is right and wrong,” said Emanuel Maidenberg, a clinical professor of psychiatry and biobehavioral sciences at UCLA.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
Economics hasn’t been able to explain irrational choices. Can neuroscience?
Humans often make bad decisions. If you like Snickers more than Milky Way, it seems obvious which candy bar you’d pick, given a choice of the two. Traditional economic models follow this logical intuition, suggesting that people assign a value to each choice—say, Snickers: 10, Milky Way: 5—and select the top scorer. But our decision-making system is subject to glitches.
In one recent experiment, Paul Glimcher, a neuroscientist at New York University, and collaborators asked people to choose among a variety of candy bars, including their favorite—say, a Snickers. If offered a Snickers, a Milky Way and an Almond Joy, participants would always choose the Snickers. But if they were offered 20 candy bars, including a Snickers, the choice became less clear. They would sometimes pick something other than the Snickers, even though it was still their favorite. When Glimcher would remove all the choices except the Snickers and the selected candy, participants would wonder why they hadn’t chosen their favorite.
In the primaries, he avoided policy debates by promising to build a wall—but the general election is forcing him into specifics.
The biggest political story of the last week has been Donald Trump’s flip-flop on deporting undocumented immigrants. This Sunday on CNN, Mike Pence filibustered his way through the subject for almost seven minutes before Jake Tapper finally declared, “You did not address the issue” and moved on. Chris Christie on ABC and Kellyanne Conway on CBS were no more coherent. The Daily Beast summed up the morning with the headline, “Immigration Flip-Flop Leaves Trump Campaign Flailing on Sunday Shows.”
But focusing on Trump’s “flip-flop” misses the point. Trump’s real problem isn’t that he’s changed his position on immigration. It’s that he’s trying to formulate one at all.
What the commentary of the last few days has generally overlooked is that while immigration was key to Trump’s success in the Republican primary, Trump never actually offered an immigration policy. To the contrary, his success rested in large measure on his ability to avoid one. Trump’s strategy on immigration, as on other key issues, was to cut through the Gordian knot of public policy with aggressive, quick fix solutions. Terrorism? Ban Muslims. ISIS? Bomb the hell out of them and take their oil. Loss of manufacturing jobs? Slap massive tariffs on companies that outsource American jobs.