I had a long conversation last weekend with the MD of a Financial Services company to see how closely his private-sector non-economist perspective accorded with my own (which is probably the consensus among public-sector economists), that Anglo should have been allowed to collapse and the developers bankrupted if necessary. There was little difference in our perspectives!
He thought the idea ludicrous that Anglo-Irish could regain the trust necessary to get back to “business as usual”. Also, he tells me that a receiver will not necessarily dump all distressed assets onto the market at once (which some might think of as a possible rationale for what the government has done) but can hold off in order to maximise their sale value. Anglo Irish staff, furthermore, would not have the skills to act as a receiver or even as a “bad” or “collection” bank. The only (theoretical) logic for nationalisation that he could see, since we were in agreement that Anglo is not of systemic importance, is that there might possibly be spillover effects in terms of job losses etc. associated with widespread concurrent bankruptcies.
Since virtually the entire economics community is agreed that Anglo should have been let go, the question arises as to who is providing the advice that the government is listening to these days? Not Patrick Honohan obviously, though he’s right on their doorstep and has been dealing with financial crises for the last two decades. Is it the same PWC (as Martin Mansergh suggested on radio) who gave the banking system a clean bill of health as recently as last Autumn? I googled PWC yesterday and found them to be amongst the “soft landing” merchants of recent years. Why would the Finance and Central Bank economists’ perspectives differ so dramatically from the consensus reached by the rest of the public-sector economics community?
A question that academics will ultimately have to revisit concerns the (few) academic analyses of recent years that found property prices to have been largely driven by fundamentals. I remember commenting on one such paper to make the following point. The real interest rate used in the analysis was the nominal rate minus recent house price inflation. But if the latter were a bubble, the real interest rate would be underestimated and the fundamentals exaggerated. I didn’t find the explanation offered to be convincing.