Like tomorrow doesn’t exist…

Was curious to hear yesterday in the radio about an article in Gazeta Wyborcza by its correspondent to Riga, capital of Latvia. The piece of writing mentioned in the press review turned out to be a just short story with quite astounding purport.

To sum up, as the author claims, Riga, this year enjoying the status of the European Capital of Culture. One event follows another, the carnival goes on, the Latvians live it up and make the most of the life, before a disaster aborts the festival. Inhabitants of Riga are deeply convinced Putin’s fifth column waits round the corner, ready to intrude into Latvia, as they invaded the Ukraine. The journalist argues an equation mark between Latvia and Ukraine is illegitimate since Latvia, unlike Ukraine, is a member of the EU and NATO and Putin would not dare to attack the military alliance because deep down he and his administration realise they would be defeated by united armies of NATO. Such arguments do not persuade the Latvian interlocutors who point out the Russian president is immensely unpredictable and ingenious and Russians as a rule do not let up.

Whenever hearing about Russian minorities in Baltic countries when the Russian parliament enacted a law entitling the Russian authorities to take every step to defend rights of mongered Russian minorities beyond the borders of Russia, contingency of Russian army stepping in to Latvia seemed incongruent. I had in mind the same argument – Putin would not dare to attack NATO, as it would mean a suicide for him. A few months later, after the Malaysian civil airplane was shot down and given how situation in Eastern Ukraine unfolded, I have changed my mind. Putin might come to a point when, after losing the battle for Ukraine and after suffering other prestigious defeats, he might have nothing to lose. In such situation, i.e. when you are bound to lose everything when you give up but if you take action you may either also lose everything or win something back, placing a dicey bet is economically justified.

The article draws a parallel between what goes on in Latvia and the summer of 1939 in Poland. Three quarters of century after the outbreak of WWII I wonder how it felt like in Poland in August 1939. The war was in the offing, its onset was just a matter of time. There was something in the air, probably the gut feeling something was inexorably about to end soon. Would anyone share the memories of their parents or grandparents?

Let’s figure out how people behave when they realise the end of something draws near and is inescapable. As the history proves they try to relish on every moment, cherish the life and quite frequently indulge in debauchery. Oddly enough, this sinful picture grossly contrasts with Christian commandments. For some reason, God-fearing people rarely pray, go to church to confess their sin ask for penance or beg their fellow men for forgiveness for the harm they have done them. Conversely, they push salvation away from themselves…

If I were to face such situation, from today’s standpoint, I would keep on living the way I do. I have no influence on what the fate brings. Orchestra on sinking Titanic kept doing its job until the very end. Business as usual, one would say and this strikes a chord with me.

Oddly enough, five years ago Mr Tusk and Mr Tusk strolled down the pier in Sopot before commemorations of 70^th anniversary of WWII. Today relations between Poland and Russia are, to put it mildly, tense, but just like five years ago I am glad in have the luck to live in peace.

Wishful thinking

Don’t wait for the perfect moment! Take the moment and make it perfect!

7 December 2008:

- Why do you argue now is the right time to buy a flat? When will the property prices go up again?

- Prices won’t rise soon, however in my opinion the third quarter of 2009 will bring the onset of slow, yet stable upward trend (…) Those who take decisions swiftly will be the winners.

- Do you think then prices on secondary market will not decrease in the coming months?

- Where they were meant to fall, they have already fallen.

1 March 2009:

The scales on the property market have not been tipped so favourably for a while. And it seems this won’t last long. Hurry up then!

3 June 2009:

Decline of property prices has come to a halt and prices are not going to fall any more. This is a good moment to buy a property, but a bad time for selling it.

12 July 2010:

Property prices are still low and banks are more willing to grant loans. According to property agents, this is the perfect moment to buy a dreamt-up flat.

Some time later in the second half of 2010:

This is the best moment to buy a property. It won’t be any cheaper!

24 November 2011:

Some property agencies seem affected by the slowdown on the market, other describe the current market as ‘stable’. Nevertheless, all property agents claim in unison this is the perfect time for property buyers.

11 December 2012:

Last days of 2011 and first months of 2012 will be the perfect time for property purchases – experts convince.

13 April 2012:

Whoever plans a property purchase should not put it back. Downward trend in prices is likely to reverse.

27 August 2012:

If you consider buying a property, this is the perfect moment. Prices have gone down, but fewer buyers can boast about desired creditworthiness. Even if next year prices fall, the decline will be negligible.

5 October 2012:

Planning to buy a flat? Property market practitioners point out sellers are ready to make bigger concessions in price negotiations. This indicates the perfect moment to buy has come!

19 April 2013:

Property prices keep falling and have reached the levels last seen in 3Q2006 – good moment to buy a flat!

20 September 2013:

Experts claim now is the best moment to buy a flat!

22 September 2013:

Over the last year property prices have significantly gone down. The economy is markedly reviving. The probability of further price decline is miniscule, while choice of flats is wide. It seems this is the perfect moment to buy a flat!

Chart 1: Average price of one square metre of a property on primary and secondary markets in Warsaw over last almost seven years. Source: National Bank of Poland’s quarterly report on property market, figures based on data collected from notaries (reflect only transaction prices, rather than asking prices (sellers’ wishful thinking!) in property ads).

Chart 2: Average quarterly prices of one square metre of a property in Warsaw, this time sample covers all properties from primary and secondary market. All data are transaction prices and are based on data collected from notaries. Source: excerpt (short version of) from AMRON-SARFiN’s quarterly report.

Conclusion 1: chart 1 is biased – by starting in 3Q2006 it omits the first phase of property market frenzy which kicked off in late 2005. Since then up to the peak of property market bubble (?) in prices went up by up to 100% - growth scale in time frame of 3 years (therein some 50% growth in 2006 alone) makes it justified to call it a bubble.

Conclusion 2: the perfect moment has lasted for five years. It has been one of the longest perfect moments in the history.

Conclusion 3: based on the recent history of property price fluctuations and frequency of developers and property agents bleating about the perfect moments, there is no significant correlation between intensity of obtrusive urging to buy and higher demand for flats reflected in mounting prices.

Conclusion 4: The regularity observed during many stock market and property bubbles, i.e. when everyone tells you to buy this is the best moment to sell has proved true between late 2008 and now.

Conclusion 5: the future trend is rather unpredictable… (deserves the ‘conclusion of the year’ award ;-))

…Albeit my expectation is that within the coming year (i.e. by the end of September 2014) average property prices will decrease by 3 percent year-on-year and with 95% probability the price change will range from –10% to +6%. Over the coming decade the prices are most likely to stabilise in nominal terms and drop in real terms on average (with some deviations from the long-term trend). Here’s the rationale:

Why property prices might rise:

1. Interest rates, now at their historical lows, are predicted to stay unchanged for about a year, and then are unlikely to rise quickly. Lower interest rates have a huge impact on amount of monthly instalment of a mortgage and hence on creditworthiness. Thus a borrower with the same earnings has some 30% higher creditworthiness than a year ago. But watch out – this is a trap. The capacity to repay a long-term liability is assessed based only on current market conditions and National Bank of Poland’s base rate will not equal 2.50% forever. If it goes up by 2 percentage points, monthly instalment of a 250,000 PLN loan with current interest of 4.00% taken out for 25 years will rise from 1,319 PLN to 1,610 PLN (by 22%) if the interest rate increases to 6.00% (note annuity payments are very sensitive to interest rate changes).

2. Low income on bank deposits discourages wealthier depositors from keeping their savings in banks and makes some of them to invest in properties in pursuit of higher yields on rents. Beware though, this is a trap as well – if everyone buys flats with the intent to lease them – will the supply of new properties be matched by demand from lessees? Won’t this trend exert a downward pressure on yields to make them equal with bank deposits? And note flow of income from a relatively small group of well-off people is a rather one-off occurrence, therefore the price incline cannot rely solely on demand generated by wealthy buyers.

3. There is a group of buyers who’ve already had enough of waiting for prices to go even lower and are running out of patience. In the meantime they’ve amassed some cash, so they can either pay in 100% or take out a small loan to finance the purchase – this group is capable of generating steady demand and unlike wealthy disgruntled depositors can make the upward trend sustainable.

4. Supply of new flats offered by property developers and number of new dwellings under construction are both shrinking. As the basic laws of economics state, lower supply should result in higher prices.

5. New government-run scheme (flat for the young), bound to take effect in January 2014 – the government will fund 10% - 15% of purchase price of a flat from the primary market only. The biggest restrictions in getting the subsidy are a square metre price cap (to be set at 5,865 PLN in Warsaw in 1Q2014) and the fact an applicant must not be older than 35.

Why property prices might fall:

1. Demographics, one of key drivers of the property market. People naturally seek to have their housing needs met and want to buy (or rent, or build their own) properties. Number of young people entering the labour market is decreasing year by year and given that the population of Poland is set to contract, prospects for price hikes in the long run are downbeat.

2. The biggest demand for flats is generated by youngsters looking for their first flat (later they swap one for another, bigger one, i.e. upgrade) – not only their number is lower, but also labour market is not on their side: unemployment rate among youngsters is higher than a few years ago, many of them work under ‘junk contracts’ (banks do not view it as steady source of income), salaries for workers under 30 are much lower than before the crisis.

3. Recommendation S, issued by Polish Financial Services Authority (KNF) which states a mortgage borrower will need to put up a specific percentage of purchase price as equity. This percentage will be rise 5% in 2014 to target 20% in 2017. This recommendation (banks won’t date to try not following it) will bring to the end dicey 100% loan-to-value lending.

4. Banks’ reluctance to increase their mortgage portfolios. This product is not the most profitable (hard to cross-sell it) and its risk seems to have turned out underestimated – for many CHF-denominated mortgages, outstanding debt considerably exceeds property market value, putting banks at risk of not recovering the lent amount in case of borrowers’ defaults.

5. Future insecurity among potential borrowers – given the scale of layoffs in the corporate sector (which should by all means fall back along with recovery in the economy), many people think twice before taking out a loan for several years (who can guarantee nothing bad happens in such time horizon). Even if someone has not been affected by a job loss or salary cut, they could have observed someone else losing their source of income. Mortgage-taking spree from 2006-2008 was fuelled by booming economy and over-optimistic expectations that good time would last forever. That craze is extremely unlikely to repeat in many years.

6. Despite considerable decline (some 20% in nominal terms over last 5 years in Warsaw on average), property prices are still steep in relation to ordinary people’s earnings and for many potential buyers out of reach. Currently an average monthly after-tax salary in Warsaw (some 3,600 PLN) is enough to buy a half of a square metre of property in Warsaw. This means after two months of putting aside 100% of one’s salary (in practice impracticable) you can buy one square metre of an average flat; after a year you can buy six square metres; after eight years of not spending at all you can buy a decent one-bedroom 50-sqm flat for cash.

7. In the meantime costs of living have risen disproportionately to nominal wages growth. This means the discretionary income, i.e. the share of monthly cash inflow that can be either saved or spent on mortgage payment has dwindled. Needless to say what effect it has on demand for properties.

I’m planning to buy a flat in about a year. Hope the wind blows in the right direction…

Poles aged 30 – portrayed, but accurately?

From time to time journalists of Gazeta.pl (online flank of Agora S.A., one of the most influential, leftist-liberal, media holdings in Poland) come up with series of articles dwelling on social problems. Quite recently two of them encouraged readers of the portal, aged near 30, to share with wider audience how their dwellings looked and what their material status in terms of housing conditions was. I usually keep track of such series with some does of curiosity, but that time I impatiently waited for each consecutive article, then read each of them with bated breath and avidly followed record-long comment threads…

The larger project run in attempt to paint a collective portrait of generation of 30-year-old Poles began by posing a question why people born in early 1980s are reluctant to have children. In the next step journalists resolved to find out where and how those people live and how the finance their housing needs.

The first article is a string of brief stories which paint a bitter-sweet picture…

Kaśka, aged 32, and her husband co-rent a room in a bigger flat. It’s cheaper and more practical, yet at times inconvenient. Their salaries would suffice to rent a tiny flat in a shanty town, but they prefer a 20-metre room in a flat shared with other people. Tensions sometimes appear, but when they are in need, they may count on their flatmates. In the meantime they put aside money to have equity and get mortgage on more favourable conditions. As for now, no bank finds them creditworthy. Purchase of property with cash – out of reach.

Błażej, aged 30, lives with his girlfriend in her 42 sqm flat (probably inherited or bought by her parents, photo suggests it’s located in Służew, part of Mokotów district, Warsaw). Given his girlfriend’s and his earnings, they wouldn’t be capable to service any mortgage debt, nor to rent any flat. Their aspirations have been fulfilled. Probably hadn’t it been for the windfall (his girlfriend’s own flat), they would live with parents…

Agata, aged 31, and her husband live in a mortgaged flat. Shortly after getting married they lived in a rented flat, then when a child’s birth was imminent, they took out a loan. Month by month, they move closer towards “full ownership” of their flat.

Piotrek, aged 30, and his wife, with some support of their parents and bank financing, bought a 70 sqm on city fringes. In his view this was a fair trade-off between location and size. Debt burden is not excessive and the flat would be spacious enough when children are born.

Anka, aged 29, is also one of those better-off. Since she was 20 she lived in flats inherited after family, currently she and her husband live in a house built on a plot donated to them by husband’s parents. She’d be damned if she dared to complain about her housing conditions.

The stories above bring a moderate dose of optimism. All character manage, some better, some worse, but are satisfied with what the have and keep cheerful. When you begin to read next sent in pieces, smile is immediately wiped off you face…

Sferyczna, single woman, aged 30. Lives in Warsaw, but hails from provincial Poland. Worked for a while abroad, but has not managed to save any money. Currently rents a tiny room in a tiny flat and estimates is 5 years will be eligible for a mortgage. Interestingly, she claims to earn more than peanuts and still she declares she can afford very little…

Karolina, aged 31, and Marcin, aged 36, have one child and live in an old flat that could do with a comprehensive refurbishment. Mortgage is a huge burden for them, each unplanned expenditure or a second child would blow over their budget. Loan instalments make up more than half of their income – this speaks for itself…

Next piece contains two contrary opinions. Rafał, aged 31, and his wife wonder whether only grumblers are around. He wants his voice to be audible. Instead of grumbling his wife and he toil away up to 60 hours per week, have built a house and bring up two daughters. Not a word about any mortgage, but he mentions his father who runs a prosperous company. Despite having little spare time, he claims he is happy and encourages to sheer hard work, which, as he believes is a key to the door of financial and personal success.

Marek, aged 27, has co-rented a flat since coming to Warsaw 5 years ago. With his earnings, little more than 2,000 PLN after tax, he can only afford to rent a small flat and pay maintenance charges, this all sets him back some 1,500 PLN – after this he has 600 PLN to spend on food, travels, clothes, entertainment??? He sees future in anything, but bright colours – with his earnings he stands no chance to get a mortgage and own any property…

Need something upbeat, don’t continue reading… A 30-year-old single woman has just bought her own flat. The mortgage and refurbishment loans have both 23-year repayment schedules, but her own flat is a step forward after years of renting and sinking money to landlord’s pocket. Living conditions are pretty dire, but glimmers of hope bring about smile on her face. In a few months the flat will be finished. As for now, she saves on everything, including food and scrapes along, to service debt timely…

Another confession, written by a 29-year-old man. He works in a public sector, is employed for a finite period and earns minimum wage. No chance to move out of parents’ house, even to rent anything. No prospects of becoming self-supporting, of raising family, no feeling of stability. He’s angry with those who stigmatise his peers who keep living with parents. In fact many of them do this not out of fear of taking responsibility for their lives, of facing adulthood, etc., but they stick to their parents for purely financial reasons. When earning 1,500 PLN after tax, attempt to taste independence is like being thrown at the deep end… Hopes for future… None… just prospects of barely getting by…

Not yet miserable? Carry on! A 31-year-old single woman has a single-bedroom mortgaged flat, but she and her daughter live with her parents. The graduate of Polish studies and Journalism, since finishing school changed jobs many times. Each was supposed to have been temporary, before she found something more desirable. In 2010, with support of her parents and a bank she bought a flat. Soon after she was offered a new job, left the previous, well-paid one, and eventually was left out in the cold, because the new employer changed its mind. Never jobless, she had next temporary, poorly-paid jobs which allowed her to pay bills and mortgage instalments. A year after it turned out she was pregnant with a man who turned out to be too irresponsible to fulfil role of a father. To make ends meet, she moved to her parents and lets her flat to repay the mortgage… She wipes every night and slowly is losing hope for a better tomorrow…

Let’s face it – those letters have been picked out of several sent in to Gazeta.pl’s editorial room. The picture of the generation which emerges is a matter of who and on the basis of what criteria chooses which letters to publish.

More interesting are plentiful comment threads under the articles, counting several hundred entries. Comments can be divided into a few categories…

Predictably, quite a few commentators trot out the “young, educated, from big cities” myth – they argue the depicted misery bears a truthful testimony how in fact the “Green Island” looks like and what the youngsters got from the party they had voted for. How long before people realise politicians’ influence on people’s everyday is much smaller than they claim? Misery of many young people can’t be put down to “feckless rule of losers and traitors”, while if the biggest oppositional party came to power, it wouldn’t turn Poland into a land of milk and honey. Society and economy are driven by actions of millions of individuals, not by decisions and deeds of few politicians. They don’t have power to heal the country and, on the other side, have little power to screw things up. If I were to be malicious, I could say between 2005 and 2007 property prices in Poland soared by almost 100%, hence becoming less affordable.

Some commentators point out those stories do not hold water – why somebody takes out a loan and than changes a job, for a worse-paid one, how some of mortgage instalments calculations match with what somebody has left at their discretion, etc.? Some even claim the stories sound so incredulously that they appear concocted.

The more ruthless advise authors of the letter who take pity on themselves to blame themselves, not the rest of the world. Who made them choose dead-end studies? Who precluded them from working harder? Who told them to change jobs several times?

Other group indicate young Poles have over-inflated expectations regarding consumption and earnings, while it takes time to grow into wealth. The only way to consume more than you can afford to is living beyond means, which means living with a ball and chain in form of debts and praying luck streak doesn’t cease, as then the frail wealth collapses.

For my part – I have no right to complain… I’m better of in comparison to some 99% of my peers. I don’t live in my own flat, but this is only my choice – I can afford to rent or take out a mortgage, but since there’s no pressure to move out I keep living in my parents’ house (and give them little money each month) and put aside some 70% of my salary. I earn very decently and have prospects of even higher earnings, but on the other hand at the back of my hand there’s a seed of uncertainty – my employer knows how to send adrenaline rising and having seen people being fired (with 1-day notice and generous severance packages) I realise no matter how committed I am, one I day I can have an inadvertent slip-up or my employer may change strategy and back out of business segment I work at, resulting in my job contract being terminated. I have job contract for indefinite period and well-above national average salary, but in return am offered no stability. I don’t go mad with the awareness each day might be the last day of my work only because I don’t have to provide for a family and have no debts to settle.

I’m also far from sharing opinions of those telling those unhappy people to blame only themselves. Success, not only financial, is a combination of many factors, including parentage (if your parents are wealthy, you’re better off at the start), skills (many are inborn I believe, you may develop them or not, but if you really lack a specific skill, developing it won’t get you far), hard work (inborn skills without hard work are useless) and luck… Every day I happen to realise where I am now and what I do is just a stroke of fate… Of course I can’t pronounce it’s prudent to take dead-end studies in political sciences, change jobs frequently, or get pregnant with an immature man, but in some cases people are inarguably out of luck and telling them to blame themselves proves only lack of empathy. Not everyone has a chance to be born in the capital city, in well-off family, to have educated parents. Most people have it up-hill and in Poland I can’t honestly say others have it downhill.

I recently calculated, with my above-average earnings and possibility to put aside most of my salary, if I was to start saving from scratch now, I’d have to save for 6 years to buy an average 50 sqm flat in Warsaw, assuming property prices stayed unchanged. Some time ago I read an average Pole would have to save for 11 years their whole salary to buy such flat. Imagine this – live with your parents for 11 years, let them feed you, don’t buy clothes, cosmetics, don’t go out, don’t travel and after 11 years you can buy a flat for cash. If your parents can’t support you financially you can only take out a huge burden on your back and pray nothing goes wrong along the way. How young Poles live is an aftermath of still steep, in comparison to earnings, property prices in Poland. As many market specialist claim, only increased supply of dwellings could help solve this problem – this can be achieved in form of public-private partnerships – local governments building in partnership with property developers council flats for rent. But for this you need a proper legal framework and wise and honest people to run such schemes. Out of reach, just like own flat for an average Pole turning 30…

Apologies in advance for taking a break from blogging next week. I’m holidaying… At last :-)

Earnings

On Wednesday my manager, while doing a research in the Internet (managers don’t surf the web at work, they are always focused on their duties) ran across an article from Warsaw pages of Gazeta Wyborcza about wages of SGH graduates… An interesting piece, particularly if you bear in mind how opaque the Polish labour market is...

The very title, literally “Graduates of Warsaw School of Economics, [earn] even eight thousand zlotys after tax, just upon graduation” would suit better a tabloid, as it includes more than a tinge of manipulation. The piece is a summary of a survey conducted among recent graduates of my university, participation to it was voluntary and answers were given totally anonymously. The sample numbered, if my memory serves me right, 837 graduates who were divided into three groups, according to period of time elapsed since their graduation, i.e. those who had graduated less than six months ago, those who had finished their studies more than a half, but less than three years ago, and those with longer post-graduation career.

The reactions the title provoked in my team, categorise it to gullet-press style. “How come?”, “How bold”, “Insolence” – my manager and head of my department, both graduates of SGH remember how much they earned as freshmen and know how high my salary is and wondered who would be eager to pay some 12,000 PLN before tax to a grown-out student. While cries of outrage died down, I induced everyone to read the article over and than return to the discussion. As it turns out, only 7.6 percent of the surveyed declared they earned more than 8,500 PLN net per month, but around 25% of the respondents asserted their monthly salary was between 2,500 and 3,500 PLN and another one-fourth said they earned from 3,500 to 4,500 PLN. No other figures were cited, so one can’t infer how numerous was the low-paid group (monthly wages below 2,500 PLN) and how many were paid between 4,500 and 7,500 PLN.

I’m leaning towards fault-finding in my attitude towards the article. The sample was rather small, bearing in mind that around 2,000 students graduate from SGH each year (I have to admit I also didn’t take the trouble to accept the invitation to fill in the questionnaire), so there were only over 60 graduates with relatively high earnings, in the group of 0.5 – 3 years after graduation (headcount of ca. 6,000). Hang on, if the survey was anonymous, everyone could write whatever they wanted and inflate their earnings, this affects reliability of such research. The puzzling thing is also that I’m a registered user of SGH career centre and I didn’t find any report on their pages. If I’m not authorised to view it, how have journalists of GW come into it? Doesn’t it cast any doubts on reliability?

There are some outstanding graduates of my school, I know some who’ve managed to climb many steps on the ladders of their careers very fast. In each population there is a fraction of very gifted people, if they are interested in economics, business, finance, etc., many of them are destined to get in to SGH, so the very group of SGH graduates does not reflect an overall situation of graduates of all universities on the Polish labour market. If we assume we agree that free market properly estimates the price that a young, outstanding employee deserves to be paid, or how much they have to be paid to fend off job offers from the competition, we shouldn’t find those earnings outrageous. Compare this to bonuses of CEOs of British banks (there’s a lot of hue and cry about this in the UK these days) and 8,500 zeds per month sound like little peanuts. And last but not least, many of those well-paid rat-racers spend more than 12 hours a day in their offices over the working week, work over weekends and grow rich quickly at the expense of their personal lives. Be aware there’s always a price to pay…

Much more uplifting is the news that some 50% of SGH graduates earn between 2,500 and 4,500 PLN and this is where I fall as well. Deep down I feel the bracket sets floor and cap for a decent salary for a graduate with considerably short experience… A proper career and earnings path should start at a rather low level and have a strong upside potential left for an employee, if they prove they deserve to move up, they should be given a pay rise.

This is what seems proper to me, but in practise appetite comes with eating. As I was about to start my current job a year ago, I thought my salary was very competitive; today I find it only very decent, but from what I discerned, where I work commitment is appreciated – so I stay patient… Plus I have to add I’m in a different situation than my peers who’ve come to Warsaw to study and settled down here for good. I don’t have to pay rent for a flat, actually my expenses are still quite low and having the luxury of owning and using a car, I can still put aside 50% - 60% of my salary. No room for discontent for sure, but well, appetite comes with eating, and the more you eat, the more bloated your belly gets…

Different interests, different views

There are few things as beneficial for public intercourse as an open and constructive debate, therefore I was glad to read a series of articles on Polish pension system written by more or less eminent experts and published in the latest issues of “Polityka”. The string of polemics has been triggered by the article I have mentioned repeatedly. In response to this, Jeremi Mordasewicz from Polish Employers’ Association wrote and had published another article, presenting an opposing view. In his feature, Mr Mordasewicz did not refute Prof. Oręziak’s arguments against pension funds but laid out his own ones on the advantages of OFE. Finally, last week “Polityka” printed a third article, by dr. Agnieszka Chłoń-Domińczak from my school, in which she debunks myths concerning pension system, allegedly spread by Prof. Oręziak.

Now it is time for me to crack down on those myths once again or maybe gainsay the rebuttals. There’s no time to lose, so let’s set out.

Myth #1: Developed countries have not decided to create pension funds with obligatory participation.
A.C-D.: Pension systems in most developed countries are quite complex and have pension schemes run by employers as their core.
Comment: Indeed, the systems in those countries function in a totally different way. In Anglo-Saxon countries those, whose benefits are not provided under such schemes have to fend for themselves on their own, like freelancers do. Moreover, an employer-run pension scheme has a tremendous edge over a Polish pension fund. It is small and flexible, what means that if it manages 10 million rather than 10 billion dollars, zlotys or any other currency it can easily adjust its portfolio to changing market conditions. Polish pension funds are in this comparisons like a bull in a china shop – whenever it makes a move everything around quakes. Another issue is how the future pensioners can influence the way their money is managed and if they have a variety of institutions where they can save, unlike in Poland, where we have 15 similar funds and the choice is illusory.

Myth #2: The only reason why the Social Insurance Fund is indebted is that it finances pension funds.
A.C-D.: Here Mrs Chłoń-Domińczak enumerates factors and decisions that have contributed to shortfall of money is the state-run fund.
Comment: I reread the article and didn’t find this “myth”. Puzzling…

Myth #3: The OFE-based system results in constantly growing public debt, what poses a threat to economic security of Poland
A.C-D.: As the projection prepared by European Commission says… …Poland will the country where the social costs of ageing will be the lowest.
Comment: Europe is far behind us in terms of social expenditures. In autumn 2008 I saw an advert of an investment fund, which went the following: “Stock indices fell by 50%, other funds lost even 60%, we lost only 30%”. Should an investor who has lost “only” 30% be happy, if he could earn 4% at the same time.
The biggest problem that the goal of the reform was to take the burden of providing pension benefits from the state. Under this lame system the state is still responsible for 80 per cent of the benefit, either in form of contributions to ZUS, or as the issuant of government bonds. The system should not rely on state at all and money should work on the market only. Because this is more risky, obligatory participation has to abandoned and the responsibility transferred to citizens. They know better, believe me. And if they don’t know, as Robert Gwiazdowski wrote, there’s a plenty of food on rubbish dumps. I also see a lot of bread and rolls scattered on the streets, so can we really speak about poverty if people throw away so much food?

Myth #4: State does not have to pay interest on the debt of ZUS, hence these payments will not generate budget outgoings.
A.C-D. The obligations undertaken by ZUS will have to be settled sooner or later.
Comment: It’s true: what is kept on accounts in ZUS are just book records, not real money. This Ponzi Scheme will sooner or later collapse, but issuing more bonds, when there’s no money in the budget is ridiculous and generates additional costs.

Myth #5: The state has to cut spending on health care, education, police, orphanages to finance OFE
A.C-D. (and me): What does one thing has to do with the other?

Myth #6: The current situation of public finances is more important than the stability of pension system.
A.C-D.: These priorities cannot stand at odds. The latter cannot be done at expense of the former.
Comment: The system which generates growing public debt will not increase our financial stability. The lower the debt is, the more stable Poland will be perceived and the lower the costs of debt service will be. Remember that higher public debts results in higher yields on government securities and this exacerbates country’s situation and hits taxpayers’ wallets. Prof. Marek Góra put forward that pension obligation should not be included in public debt. Thus we will not exceed the threshold of 60% (public debt to GDP ratio). This a creative accounting in essence, to make it worse this is allowed by EU regulations which leave the method of public debt calculation at states’ discretion (appallingly). And this creative accounting would allow the Polish state to issue more and more bonds.

Myth #7: Pension funds invest most of its assets in gilts so it is better to leave that money in ZUS.
A.C-D.: Gives a true explanation that bondholders will sooner get their payouts and pensioners who trusted ZUS will pay them their benefits one day.
Comment: But if pension funds can influence the price of bonds, this works badly in both ways round. If the yields are higher, pensioners will get more, but taxpayers will also pay more. If the yields are lower, pensioners will get less, but taxpayers will pay less. Only those who run the system will get their remuneration regardless of investment results.

Myth #8: Pension funds will squander financial assets of future pensioners by investing them abroad if they will be allowed to do so.
A.C-D.: As the past results show, Polish pension funds performed better than in other countries and this year they earned…
Comment: Firstly, the perform as the stock market does, for stock exchanges 2009 was an exceptionally good year, so pension funds could report good returns. Secondly, they cannot hedge the currency risk, since they are not allowed to invest in derivatives!!! Thirdly, since when financial markets guarantee high profits? All experts, not labour economists, like Mr Góra or Mrs Chłoń-Domińczak will tell you fundamentals play a minor role. Stockbrokers and bank dealers and other practitioners (I’m talking about those with academic degrees with at least PhD) will tell you financial markets are a big casino and are hardly ever driven by any rational premises. That is why I don’t want to blame a few managers for losses and be given the freedom to blame myself, not regulators who told me how to waste my money.

Where are the limits of freedom?

“On your knees, dog!”, a young man with a face untainted with a single thought aims a gun at a policeman. What does it look like? A scene from a film, a passage from a next coverage of tragic event in Warsaw? No, a new advert which appeared in one of Polish skateboarders’ monthlies. As the author of the picture and co-owner of a textile company which ordered this ad, there is nothing reprehensible, since the idea of threatening a policeman with a gun hatches in every young skateboarder’s head.

Now let’s take his reasoning apart. He claims a normal teenager dreams about killing or at least humiliating a policeman in service. The taste of revenge is for sure sweet, so every mentally healthy person would get their own back on their persecutors – is this how it works.
It’s just an innocuous joke, remember about it when you see a similar scene on a street. Just pass by and don’t try to react. Let guys have fun.

Everything has its limits. Everything but the human folly. And what are the limits of freedom? Other men’s freedom and, in any society, generally accepted social norms. In Poland, although it is still catching up with the West, people generally agree that people who aim guns at policemen are criminals.

So what can be done about this. The advert was published only in a niche magazine, I don’t know whether it has to comply with ethical standards of advertising. In my view the punishment should be the most severe, what in my books means financial. Those who have come up with the idea and those who have allowed it to be published should be fined heavily. If those retards who had thought it up had to pay one million zlotys for this stupid ad, the likes of them would think twice before they would something equally silly.

Should I be proud?

My school has announced on its website two professors from Warsaw School of Economics had been appointed as members of Monetary Policy Council. My university employs a lot of outstanding experts in monetary policy, like professor Krzysztof Rybiński, but for no apparent reason the current president decided to pick some of his buddies and once again set personal relationships above competencies. The previous president also for no apparent reasons designated renowned specialists – Andrzej Sławiński, Andrzej Wojtyna and Dariusz Filar.

Some time ago I evaluated competencies of Zyta Gilowska, there’s nothing I can add about her. None of fellow students with whom I discussed the nomination of Mr Glapiński and we our views simply square – he lacks knowledge, but is a close friend of Mr Kaczyński and no one else would have appointed him. He will have to learn a lot.

When it comes to Mr Kaźmierczak, the matter is a bit more complex. His field of academic research overlaps the issues of monetary policy, but there’s one significant fact about him that might have been seen as a merit by Mr Kaczyński. The new member of monetary authorities has never been a reputable figure among economists. His opinions are not appreciated, few people heard about him. He publishes in Gnash Dziennik, a newspaper of Father Rydzyk’s empire. I may be biased against him, as his dovish views are totally dissimilar to mine. He doesn’t see inflation above target as a danger for economy, it’s even conducive to economic growth as he says.

Inflation, contrary to what he advocates has to be handled carefully. It hazardously easily spirals out of control. As soon as it gets noticeable for customers, their inflationary expectations rise, so they hold out for pay rises and then when they get it, the economy is on the verge of a slippery slope.

In Poland a relatively tight monetary policy prior to the crisis helped our country avert a financial meltdown. Monetary authorities, mostly Mr Balcerowicz, who was a governor of central bank at the time were harshly criticised for the policy they had pursued. Unlike some other countries.

As professor John B. Taylor (the author of famous Taylor rule) points out in his latest interview for “Polityka”, one of the main causes of the financial crisis were too low interest rates. He also blames central banks and government for inapposite responses and openly condemns monetary policy run by Alan Greenspan and Ben Bernanke. This short interview might be helpful in understanding the origins and mechanics of what has been called the worst recession since the Great Depression.

The animal spirit of the market

There are some articles an educated man cannot just miss out on, like the one which I found in yesterday’s “Highbrow’s guide” (Niezbędnik inteligenta) insert to Polish weekly “Polityka”. On the first few pages of the insert Jacek Żakowski (incidentally probably the only journalist in Polityka’s makeup who has an excellent command of English – I infer it as he’s the only person who carries out interviews with native English speakers) conducts an interview with Robert Shiller – American psycho-economist. The whole article can be found here (in Polish) – recommendable for everyone who knows Polish.
This time I think there’s no point in summarising the whole content, instead of this, I’ll translate some of the most crucial parts of professor Shiller’s theses. Just after reading it, today in the morning, I e-mailed the weekly’s editors, asking them to provide me with the original version of the interview. My request has met the response of Jacek Żakowski in the flesh, who wrote back he had taken it down it Polish right away. That’s a pity, you’ll have to fall back on the product of my translations skills ;)

I know I have some problems with translating complex sentences, mostly with the word order, hope you’ll forgive me…

The illusion of money
J.Z.: The mortgage bubble which brought about the current crisis has not have as spectacular legend [as the collapse and insolvency of Mexican economy in the early 80’s]. No oil deposits have been discovered, no cartel has caught the mortgage market in its clutches.
R.S.: On the contrary, the pattern was very similar. The mirage of invariably low interest rates, built by FED, governed by Alan Greenspan, thanks to which even the poor families were able to serve huge debts, was the equivalent of giant deposits’ mirage. (…) The crisis which broke out in 2000 posed a threat to the swelling illusion that everyone could get richer by investing on the stock exchange. When the stock exchange failed to turn the quick profits, social hopes were pined on real estate market.
The very legend of mortgage boom consisted, roughly speaking, in the assumption that the house prices would always rise, what was a palpable absurdity. (…) As the bubble was swelling, many economists warned that neither can the prices rise forever, nor the interest rates will be kept down forever. Nobody heard those warnings. After crisis of 2000 all the reflexes of “animal spirit” of America centred on the housing market. The legend of cheap house for everyone fitted the social needs too well too be undermined by any rational argument. No one even bated an eyelid, when in 2008 the Association of Real Estate Owners, intending to fuel the bubble, placed an ad in the media, the ad stated that the real estates are the best long-term investments, cause their value doubles each ten years. People believed it. There was no way of persuading them that there was no profit in it, that it was just another example of “animal spirit”, which is “the illusion of money”.
J.Z.: That is…?
R.S.: That is the perception of prices, costs and investment which omits changing wages and inflation. Everybody remembers they bought the house for let’s say one hundred thousand dollars and is happy cause today its value rose to two hundred thousand, so they took the profit of one hundred per cent. But no one paid attention to the fact the wages also rose by one hundred per cent. (…)
The phenomenon of “the illusion of money” was very well visible during the deflation which accompanied the great depression in the United States. The American economy would have endured it much better if the employees had freed themselves from that illusion in the deflation phase. When the prices were dropping, wages remained nominally unchanged, consequently they rose substantially, what drive many companies to the wall. (…) As far as I know, none of the employers made any attempt to explain it to the trade unions that as the wages are increased along with the inflation, they should be cut along with the deflation. (…)

The herd instinct drives us to work within a group, but our mistrust makes us join it gradually, with reserve. That’s the reason why many bubbles fade. But when the legend is credible enough to reach an enormous size, the acceleration mechanism switches on.
J.Z.: Is this a symptom of the “animal spirit”?
R.S.: Huge (…) As long as an ordinary man finds out speculators from the Wall Street made millions on the speculations on houses, he looks at it with envy or with condemnation, however he does not join it. But when it transpires that his neighbours, colleagues, even brother-in-law made money on house price surge, it gets on the nerves of even those people with the most conservative approach to money. One day, during the supper spouse starts a conversation: Honey, our neighbours moved to a better borough, my workmate bought a new yacht, the property of my brother has tripled. Why don’t you take this opportunity? Why shouldn’t we transfer more of our savings into the stock exchange, why shouldn’t we buy a house to sell it at much higher price in a few years?
Thus the bubble is blown up by new people joining with new money. One day virtually everyone is engaged in it – that is the moment it bursts.
J.Z.: So financial conservatism does not pay off, the later someone joins, the less they can win, the more they can lose.
R.S.: For sure it does not pay off to be an inconsistent conservative. The more because the later someone joins the bull run, the more probable it is they would fall victim to the deception, for a few reasons. Firstly, the longer and the more sustainable the bubble is, the more excessive is its credibility. Secondly, the bigger the bubble is and the higher profits it turns, the stronger is the temptation to raise them even more. Thirdly, the profits cannot rise endlessly only faster. (…) An excellent example was the dot.com bubble – then the well-educated and intelligent experts devised a theory of a new economy based on the assumption of ceaseless growth in share prices, totally separated from work efficiency and profits of enterprises. People believed it, cause they had wanted to believe it. What can be more pleasant than the perception that if you buy some stocks you can sit on your hands and get richer thanks to the spurts on the stock exchange.

J.Z.: Is there any fix for it [helplessness of market participants against growing unmanageable risk]?
R.S.: Primarily the economic awareness should be disseminated just as it was in case of health awareness. (…) Today an ordinary man, who cannot afford to pay for the services of expensive advisory offices, takes the advice of advisors who are paid by banks, mutual funds or insurance companies. Those advisors mostly mind the business of the ones who pay them. Consequently millions of customers and small investors follow the advice of advisors, who are in fact salespeople and take irrational decisions – take out loans they will not afford to pay off, buy houses the cannot afford or invest all their savings in securities which soon will be worth as much as the paper they’re printed on. There are two sources of crises that can be distinguished – firstly people lack competencies which are essential to perform in a market economy, secondly the ones who cannot afford to make mistakes cannot also afford to pay for advice provided by impartial and competent advisors.
J.Z.: What should those impartial advisors tell them?
R.S.: Most of all they should inhibit the behaviours which arise from their animal spirits, that could be done only through giving them objective knowledge. They also ought to offer investments in special products, overseen by the government, destined for the people who cannot take the risk. The poorer people are, the more they pay for the mistakes made when they were driven by irrational reasoning.

The commendation of non-conformism
(…)
R.S.: I have a wife. She’s a psychologist. That’s why I found it harder to believe people take rational decisions. And I have never yielded to the quite common belief that complex processes which take place in the markets can be described with simple equations. (…) Even the teacher who expelled me from Sunday school accused me of my propensity for challenging everything my friends had taken for granted, stating my behaviour had been unacceptable. Roughly the same I have heard from Tim Geithner, who as a governor of FED ousted me from the board of advisors. All they wanted a simple, mathematical answer to the question of the sources of rising mortgage bubble and I have been returning to the unpredictable animal spirit of the market. There is always a group of people who do not put stock in the commonly recognised truth, instead of this they start wondering where is the catch…