Tuesday 28 April 2015

The ice bucket challenge and why direct support should be aimed at households

Published 26/08/2014 | 02:30

Top Irish models get a dousing in aid of the MND Ice Bucket
Top Irish models get a dousing in aid of the MND Ice Bucket

What does a viral outbreak and a social media money spinner for a charity have to do with Europe's broken banks?

We live in networks of friends, family, colleagues, communities and countries. Our banking systems are networks connected by flows of money moving between individual banks, across country borders. Many of the processes we now understand as being 'of' the economy are, in fact, spread over networks.

Think of how you decide to watch a film. You listen to recommendations from sources you trust. The good films tend to cascade, with good recommendations following the good films, and so forth. Blockbuster films come from this 'good' information cascade, and big films can flop for the same reason. The same mechanism, where positive or negative information gets diffused like a spray of perfume through the air, is in effect when stock market crashes happen. Suddenly, the market crashes as everyone decides certain assets are not worth what they thought they were worth, and everyone sells off. Networks matter.

In case you haven't heard about it, the ice bucket challenge is a viral fundraising scheme where one person gets drenched in icy water, donates money to the very worthy charity helping those suffering from motor neurone disease and, crucially, before the challenge, publicly nominates three other people to take it also. The result is a social media virus, spreading as people take part and nominate ever-increasing numbers of friends.

Why am I calling such a worthy cause a virus? Because it has the same properties as a virus, like the common cold, spreading through a population. People who study how viruses spread have a term called the epidemic threshold, below which people get sick. But the general population is unlikely to get sick in the same way. In an epidemic, the number of susceptible individuals has to be high, and the number of their infected neighbours has to be high, to allow the virus to evolve from a localised infection to a full-blown epidemic. What we have in the ice bucket challenge is an epidemic of giving. (A very good thing, given how battered Ireland's charities have been after the CRC and Rehab scandals).

If the ice bucket challenge is a positive viral example, the contraction of bank credit after 2007 was a negative example. Banks just couldn't trust one another to lend, so the available credit lines dried up and the system went into a kind of shock. The Bank of England's chief economist Andrew Haldane has estimated the scale of worldwide intervention to support the banks through this crisis was $14 trillion, or almost a quarter of global output in one year. This figure includes liquidity and capital injections, debt guarantees, deposit insurance schemes and asset purchases like NAMA.

The network of banks is changing as the rules governing the banks change. The introduction of a new eurozone-wide bank-monitoring system and its attendant banking union will change how banks do business, and Ireland's banks are no exception. Despite stuffing them with capital during the crisis, they may now require more capital to meet the new regulatory limits imposed on them by the new rules being made in Brussels and Frankfurt.

Does prosperity propagate like a virus? In the respected journal Foreign Affairs, political scientist Mark Blyth and financier Eric Lonergan argue the IMF and central banks should start giving money directly to households, rather than banks. A viral spread of disposable income. In any other period, this idea would be seen as too insane to print, but these are remarkable times.

Europe is teetering on the brink of deflation, where the general price level falls and keeps falling, especially if Russian sanctions bite deeply into the French and German economies. Blyth and Lonergan argue for a household credit to the bottom 80pc of households, which will either increase spending by allowing households extra income, or reduce debt levels, helping banks' balance sheets. This increase is financed by central banks creating money.

Now, before you start worrying about hyperinflation and imagining wheelbarrows filled with euro being used to buy bottles of milk, this is not an inflationary move when there is very high unemployment and we see low inflation, or possibly a deflation, within the economy.

The net effect would be similar to a tax cut: you would see more spending and the economy would grow.

Stephen Kinsella

Irish Independent

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