economic-incentives.blogspot.com … banks.html
That’s a lot of overseas deposits in the Irish banking system in January 2008, right? Add in the interbank borrowing, which has to have been all from overseas and you have a big wodge of capital flow in the country.
Now add in that in 2001 the esteemed FF government allowed Irish banks to issue covered bonds, vastly increasing their capability to expand their balance sheets.
Commercial covered bonds were permitted in an amendment to the 2001 act in 2007:
finance.irlgov.ie/Viewtxt.as … nuary+2007
(Kathleen Barrington had this to say about the amendment in what I consider to be an excellent piece
sbpost.ie/news-features/bowi … 54486.html ).
(As a side issue, I begin to suspect that Anglo was in deep trouble in 2006/7 and that this amendment was required to keep Anglo going for a while longer. By being allowed to enter the covered bonds market, Anglo could get cash to cover its derivative losses… sadly, I suspect it used that cash to bet on IRS in a substantial way and came unstuck with the GFC…).
When you consider both the extended level of securitisation available and the extent of capital flows into Ireland, you might want to have a look at this:
ftalphaville.ft.com/blog/2011/03 … isconnect/
The imbalances-housing boom (dis?)connect
Posted by Cardiff Garcia on Mar 10 21:24.
This will sound familiar.
The problem: FX-reserves-hoarding countries, often collectively referred to as “China” (though there are plenty others), bought USDs either to artificially hold down their currencies and boost exports or to defend against the kinds of outflow-driven busts that were prevalent in the late 1990s. They invested said USDs in US treasuries and agencies, which held down real interest rates in the US, which then led to the property BOOM.
The solution: These countries should stop intervening in their currencies, instead embracing a combination of macroprudential measures and monetary policy appropriate to their domestic situation, thereby letting global imbalances gradually reverse themselves. The drawback is that politically connected export industries will complain; the advantage is that they get another tool for fighting inflation, and the spending power of their citizens gets an instant BOOST.
The latest example of this argument that we’ve come across came from Janet Yellen last week, in a speech titled “Improving the International Monetary and Financial System”. It’s also an integral part of Bernanke’s “savings glut” hypothesis.
But as we pointed out last September, some scholars are sceptical about the soundness of those bridges connecting imbalances to lower interest rates to housing bubbles. Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko found that imbalances have a weaker relationship with home price movements than many people think. Adam Levitin and Susan Wachter described the US bubble as primarily “a supply-side phenomenon, attributable to an excess of mispriced mortgage finance.”
Well, along comes a new paper, posted Thursday to VoxEU, that seems to bolsters the original case.
The referenced VoxEU paper is here: