Morgan Kelly's economic warning
Madam, – I assume that your report (Business Today, May 24th) is a fair representation of the Department of Finance’s stated view of Morgan Kelly’s warning (Opinion, May 22nd). If this is the case, it follows that the department spokesman is party to some singular insights into economics not enjoyed by other (lesser?) members of the economics profession. The alternative would be to conclude that he was being disingenuous to the point of duplicity.
He asserts that Mr Kelly errs in stating that the banks’ senior (bond) debt was bought by purchasers who did not thereby accept any risk burden. Mr Kelly’s failure was to appreciate that his assertion that “. . . the international institutions that bought Irish banks’ bonds knew there was a risk of default, was incorrect, as most of the bonds are senior debt and carried no risk premium.”
And all the time I and many others had assumed that senior debt-holders merely stood higher in the queue of creditors in the event of losses occurring than other, less fortunate creditors. I now learn that there was no risk premium, no risk of default, in whole or in part, on those bonds and no need for many silly bond-holders to take out insurance against default. However, this insight into lending, borrowing and risk-bearing sits rather uneasily with the following sentence in your account, in which it is stated that these bonds were covered by the guarantee. Perhaps the department could reveal why, if the bonds were truly risk-free, it was necessary to guarantee them? I am similarly impressed by the department’s clarification of the relationship between GDP and GNP as expressed to your correspondents. I was a victim to a misconception to the effect that GDP is a measure of the value of goods and services produced in Ireland, regardless of to whom this value accrued, in Ireland or elsewhere, while GNP is the value of goods and services produced inside or outside Ireland accruing to households and firms in Ireland. I am delighted now to realise that GDP measures output produced in Ireland that the Government can (but may not in all cases) tax, while GNP measures the output of Irish citizens and companies, including income earned by them but taxed elsewhere. I shall ensure that my colleague, Rodney Thom, amends the macro section of the next edition of our textbook to embody this insight.
Finally, I am pleased to learn that the Governor of the Central Bank believes that the Irish banks started the boom years with plenty of capital to cover losses. Unfortunately, this happy state of affairs did not exist at the end of the boom, which is why we have a banking crisis. Vacation sunlight here in Italy is more enjoyable as a result of all this enlightenment.
– Yours, etc,
Madam, – Morgan Kelly: a voice in the wilderness. I sincerely hope not, for all our sakes.
– Yours, etc,