Home truths for Charlie Weston

Charlie Weston is the Personal Finance Editor of the Irish Independent. The Irish Independent in turn is probably the greatest receptacle of garbage posturing as journalism in Ireland. It is match made in heaven.

Friday is the day refuse is collected up my street. Friday was the day Charlie wrote this "opinion" piece:

http://www.independent.ie/opinion/columnists/charlie-weston/charlie-weston-lenders-ignoring-home-truths-with-rate-hikes-2252146.html

This gives the gist of the column:

IT makes little sense, and it was probably never meant to. At a time when record numbers of homeowners are at the pin of their collars trying to repay their mortgages, lenders are piling on the pressure by hiking interest rates.

In the past year alone, mortgage interest costs have shot up by 16.5pc, according to the Central Statistics Office.

The CSO only looks at standard variable rates when it examines mortgage costs, so the statisticians are reflecting the pain being borne by those with these variable mortgages.

Lenders are free to push up variable rates whenever they want -- something households with these types of mortgages have learned to their costs in the past year.

It is hard to get your head around the 16.5pc figure, but what it means is that a family with a not-untypical mortgage of €250,000 has seen the annual cost of repaying it jump by €1,300 in the past 12 months.

In monthly repayment terms the original payment of €954 a year ago has now zoomed up to €1,110, based on two separate 0.5pc increases in the past year.

...

This is at a time when the European Central Bank has not moved its main rate off it record low of 1pc since May last year

Such drivel perpetuates ignorance of financial matters. That would seem to me to be at odds with the general job description of a "Personal Finance Editor", even at a newspaper that chooses to inhabit the lower reaches of the newsprint media.

The ECB rate Weston refers to is of course the "refi" rate. This is the rate at which banks can secure short term liquidity (but increasingly long term over the financial crisis and beyond) by handing over assets like government bonds as collateral. It is a bit like going to the pawn broker. Of course, at the moment the pawnbroker is acting like Saint Vincent de Paul, charging banks little in interest and allowing more freedom in terms of collateral and term. Nevertheless this is short term and requires assets to be handed over.

What this refi does not do is determine the total cost of money bank have available to lend at all times, because that is determined by the major sources of their capital which includes:

• What banks need to pay to attract deposits
• What banks need to pay as interest in short and long term bonds to investors
• What banks need to pay other banks for short term borrowings (interbank funds)

All these are determined by a number of factors that are determined by the market in general and the specific bank concerned. Needless to say that the agents listed above (depositors, other banks, investors) have been and continue to be far less interested in giving charity to Irish banks - which is what the 1% ECB refi rate effectively is.

So the point good old Charlie should be making plain is that mortgages have gone up because that is the true cost of the money borrowed by Irish households. It is now better reflecting what they should be paying given what a risky proposition they are. In fact, what a risky proposition they always were, but haven't had to pay over the bubble times.

Of course I get the feeling that the intention of the piece is to make people think that banks are profiteering. As an unwilling shareholder in Irish banks, like every other Irish taxpayer, I only wish that was the case.

And just to put things into proper perspective, despite these shocking increases that Charlie is up in arms about standard variable rates range from a low of less than 3% for the most attractive customers up to the more typical 4%. To claim this is usury borders on outright lie. Strange how Charlie never specifically mentions these rates. I wonder why.

What figures Charlie does throw around includes the €1,300 annual increase in mortgage repayments for a hypothetical €250,000 mortgage. This is apparently beyond the pale according to Charlie, although remember this is price charged for something borrowers voluntarily agreed with the bank.

Here is something that is also putting "hard pressed homeowners" under pressure. It is also something that is dumped on homeowners with no choice on their part. Tax. Yes, if we imagine that this hypothetical €250,000 mortgage is held by a homeowner with a €65,000 salary (€250,000 is too much to borrow on that level of income, but it is a realistic scenario in Ireland - hence the problems) we would note that the tax burden of such a person has increased by about €2,600 over the last couple of years. And you can bet that homeowner didn't voluntarily enter into an agreement to set up one of the most over inflated, wasteful, inefficient and in far too many areas completely pointless public sector.

No the politicians decide that and simply send the bill.

But the following is the kickker as far as Charlie is concerned. This is what he wrote around a year ago, when the problem wasn't rising variable rates, but falling rates, which those people who had fixed their mortgage could not participate in and would need to pay some recompense to the bank if they wanted to welch on their deal.

http://www.independent.ie/business/personal-finance/fixed-rate-mortgages-fee-could--be-waived-1721541.html

Some people on fixed rates are paying up to €600 more a month more than those on variable home loan deals.

But to get out of these deals lenders impose a penalty, called a redemption fee. This is the cost difference between the rate the customer is on (which can be as high as 6pc) and the rate presently charged on its variable rate.

...

Granted, people locked into bad value fixed rates should have been aware of what they were getting into.

But as enormous flexibility has been shown towards our banks by the State, it is not unreasonable to expect banks to be flexible towards those stuck on fixed rates.

I would hate to enter into any type of wager with Charlie. Could you imagine the rules; "heads I win tails you lose".

"Unprecedented" warming (or, how certain are you of that trend?)

Global temperatures have been rising for the last 50 years right? That is not to controversial. Look at most data that attempts to produce some average temperature for the earth over time (whatever that actually means) and there is a self evident increase. It has been warmer in recent decades that it was in earlier decades.

Ignoring potential sources of error over time (including unsatisfactory adjustments for urban heat affects, areas that haven't had sufficient measurement coverage in the past or even now, such as oceans and the poles) and just taking data as given, the increase over the last 50 years appears to be around 0.8 degrees. People get hold of this data, plot a line through it, proclaim that there is a positive trend. It is from that observational position that the hypothesis of the enhanced greenhouse effect is employed to explain the trend and then extrapolate into the future.

Think carefully about this. There are two distinct points here.

• Historical observations.
• Hypothesised causes.

The first is just acting as witness to what we can measure. The latter is an application of an hypothesis.

I make this point because, in this post, I want to deal solely with the former. What exactly does the historical data tell us with any certainty in terms of behaviour? Simply saying "it has gone up" hides a multitude of sins. What I am trying to investigate is whether the data we have witnessed is indeed extraordinary. Is it so unusual that we need to search for some, or even any, explanation or cause?

I am going to do this, like all statisticians by employing a model. I am going to start with a basic naive one the explains any monthly temperature anomaly as being zero plus or minus some random element. This random element will be described by a Gaussian (or normal) distribution, be centred around zero and have a variance of about 0.01 (which means a standard deviation of 0.1).

This would be written as Tt = N(0,0.01) ; Tt= temperature anomaly at time t.

Such a model would lead to a history of temperature anomalies over say 30 years that looks something like this:

No need for fancy statistics. There is no trend here. Just stable temperature about some constant average over time, affected by some random noise from month to month. This doesn't look anything like the actual record for global temperature anomalies, which everyone agrees seems to have risen over time. And therein lies a weakness. When people look at the actual temperature series and think "this is definitely going up", they are implicitly comparing it with the model above. Because it is clearly different, an intuitive reaction from most people is that:

"there must be something going on to push up temperatures"

And from that point a leap is made to try and find some hypothesis, possibly any hypothesis, that will "explain" the cause of the obvious positive trend. But what if this model is wrong. What if the nature of temperatures is better described by an alternative model that has different characteristics. Well, you might not be surprised to find out I think that is the case.

Let's think a little more deeply about (monthly) temperature anomalies. Our naive model above assumes that the temperature in one month is unrelated in any way to the temperature in any other month. But it is reasonable to postulate that maybe temperatures are related between months. The global temperature should reflect the transfer of energy around the world. It should operate with lags and so we might expect that the temperature anomaly witnessed in any month is in part affected by the anomaly witnessed in previous months. If it was unseasonally hot in January, then it should be more likely to be unseasonally hot in February. What this describes is an auto regressive process. We can investigate the data to see if there is any reasonable sign of such a phenomenon and to try and estimate the size of it.

So that is what I did. And a simple piece of statistics indicates that there seems to about two months months of inertia. In fact it tends to indicate our model should be more like this (the 0.65 and 0.25 drop out of the analysis:

Tt = 0.65*Tt-1 + 0.25* Tt-2 + N(0,0.01) ; Tt= temperature anomaly at time t.


So, let's now see what sort of series of temperature anomalies this type of model might be expected to produce. Here is simply one example, but note that this model will produce a much greater range of apparently different results:






















Compare this with the first chart. There appears to be a clear trend (I have drawn the linear trend). In fact there is a trend that equates to 1.4 degrees per century - or about 0.7 degrees over 50 years. This is pretty much exactly what we have witnessed from actual temperature measurements over the same sorts of periods. Compare it with an actual temperature series over a similar period (this is from the University of Alabama Huntsville):




















So what is going on? I have created this series of data using a very basic and naive model that reflects the actual measured characteristics and contains in it absolutely nothing that might cause warming. The trick of course is that this is but one potential outcome. I could generate another series and it might have a cooling trend, or no trend. But the salient point remains. Simple random data over time can generate what appears to be a material trend caused by something, when it is in fact simply an random outcome well within the range of what one might expect.

If you conducted some proper statistical tests on that series and the computed trend, you would find that the trend is not statistically significant. It would confirm what I have just said, that such an apparently significant trend - as high as that which is estimated from actual temperatures - is within the range of what might be randomly generated without any physical cause.

So, when I am asked to consider whether we are at risk of producing dangerous climate change, I have trouble getting past even the first obstacle. What does the data show us. Up until now, nothing that doesn't appear within the expected range of outcomes given the characteristics of the data involved. A trend that isn't particularly special.

Now this doesn't rule out human influence on the climate, in the form of CO2 forcing, or other localised influences (such as land use change). However, it does nothing to support the argument that we are definitely experiencing dangerous rates of warming that can only be explained by physical causes over time.

How regulation kills our quality of life

I enjoy listening to music on the bus on the way to work. So I bought myself a new iPod. A great little piece of technology (except for Apple's anti-competitive business model). I have found out after buying it is is useless for listening to music on the bus because you can't hear over the ambient noise of engine, wind, tyres etc.

I initially thought there might be a fault with it, but to my dismay I found out that those useless drains of the taxpayers' pocket, the European Commissioners and Parliament, decreed regulations that set the maximum volume output for such devices.

What a piece of life diminishing regulation, proposed and decreed by buffoons looking for things to do. iPods have always had a volume limiter you could set so that you didn't inadvertently turn the thing up too loud. But apparently, the people eating the cake are to be directed and told what to do, so a permanent limit needs to be set by the manufacturer.

Thank you, stupid, idiotic, moronic, manipulating, parasitic, tax stealing politician and bureaucratic apparatchik. You have wasted €150 of my money, which I have blown on a device that can't do what I, reasonably, want it to do - let me listen to music on the bus.

The industrialised world is truly killing itself cut by cut.

Recession? What recession?

Ireland's recession is over!!! Hurrah!!!!

After removing regular season influences, GDP increased by 2.7% in the three months to March, compared with the three months to December 2009. That must mean the recession is over, right? Growth has resumed right?

Wrong.

The Irish economy is a curiosity in that its underlying structure is badly distorted by government industry policy (read meddling) and the statistics we might use to measure it are tainted by accounting fiddles to the point they are almost as useful as measures of Bernie Madoff's investment performance.

Because the crux of the matter is that the amount of value added created in Ireland by Irish entities has continued to fall. While GDP increased, GNP fell by 0.7% in the quarter. As a nation we have continued to suffer a fall in our income and that is the only thing that matters.

Let's explore this in a little more detail. There is some useful background reading in this topic here and here.


The difference between GDP and GNP will be net foreign income. If you deduct that component of GDP (net output) that represent is effectively owned by foreigners and add net output created created overseas and owned by Irish residents you get GNP. Examples of the former would be profits generated (more accurately reported) by Microsoft or Dell operations in Ireland. The latter would be profits of CRH in the US.

Add to that the accounting shenanigans practiced by companies resident in Ireland and you have a recipe for a complete distortion of the true state of health of the Irish economy as you do here.

Exports may have increased and pushed up Irish output (GDP), but there is no way to know if that simply isn't the result of an accountant's pen. What we do witness is that the supposed rise in output in the economy, had absolutely no apparent positive affect on the income of Irish residents (GNP).

This tells us nothing new. As I noted in the blogs I link above, Ireland is not a "small open economy". Exports provide relatively little feedback into the economy. If Dell exports more (or records in its accounts that it exports more), that simply means that they are importing more parts from abroad to then crudely bang together and sell on, or they are just writing up their profits by claiming more revenues from abroad.

What appears to be happening here? I reckon it is most likely the latter, for two reasons. The import response to the rise in exports was muted (for any merchandised exports like pharmaceuticals, chemicals, IT equipment etc. companies need to import more to export more). Secondly, with some modest improvement in foreign European markets, there is increased incentive to record revenues in Ireland - over 2008 and 2009 Google or Microsoft for example would have recorded less in profit or even loss in higher tax jurisdiction. Once demand stabilises to the point that they are no longer loss making, they start to transfer more in way of revenue to Ireland in order to bring any profits within their low tax jurisdiction.

It all amounts to smoke and mirrors basically. Keep watching the GNP figures before GDP. The state of the labour market gives the best cues - unemployment is still on the rise the latest figures show.