Learning from the Financial Crisis: Globally and Locally

Colm McCarthy’s suggestion that an inquiry into what went wrong is gaining some level of support in political circles.  While there is plenty of material to digest in terms of what went wrong locally, there is also a lot of interest in understanding what went wrong in the international financial system.  Part of the debate concerns the role of economists, especially in terms of forecasting such crises.

A reader recommends this blog post which is critical of mainstream macroeconomic models.  Of course, Willem Buiter of the LSE issued a notorious critique a while back.

More recently,  a group associated with the British Academy wrote a letter to the Queen to answer her question to Luis Garicano of the LSE as to “if these things are so large, how come everyone missed it?”, while Robert Lucas defended mainstream macroeconomics in the Economist magazine in this article.

An important dimension of this debate is the relative roles of economists in policy organisations, the financial sector and academia in assessing the risks of a crisis and speaking out on these risks. While some of the debate has focused on the role of academic economists, it is maybe more difficult to evaluate from the outside the performance of economists in policy organisations in providing risk assessment, since their advice is often confidential.   In this regard,  the external evaluations of the performance of the IMF in previous international crises sets an interesting precedent, with the Independent Evaluation Office now playing this role on a regular basis.

In relation to Ireland,  the testimony of Kevin Cardiff of the Department of Finance at a recent Oireachtas Committee hearing is quite interesting in explaining the evolution of the thinking of the Department in the run up to the crisis.  You can read the transcript here.

43 replies on “Learning from the Financial Crisis: Globally and Locally”

Even more interesting is Mr. Cardiff’s (and this one presumes the DoF in general’s) aims for the banking system:
“Mr. Kevin Cardiff: Getting to the basics, what we need for the economy is that it has a banking system that is stable and capable of maintaining itself. Various efforts have been made by the Government to achieve this, including the guarantee, the recapitalisation and what we will be doing in terms of NAMA.”

So, no lending required? We are going through all this pain, all this risk just to keep the banks breathing?

As the reader who suggested the “blog post which is critical of mainstream macroeconomic models” I want to add a couple of observations.

I think the blog post and the underlying paper to which it refers are an important addition to the current debate both globally and in Ireland. The paper goes further into the debate about “no-one saw it [the global recession caused by the financial crisis] coming” alluded to by the oft-repeated question of QEII. It analyzes those few (12) economists – Roubini, Godley, Shiller, Keen, Harrison et al – who did see it coming, specifically that saw not just the collapse of a bubble in U.S. housing but also that this would lead to a U.S. and potentially global recession. (The question of how the mortgage and other credit derivatives propagated the financial crisis around the world is not center stage.)

The author identifies common characteristics of these analysts, particularly the use of accounting or flow-of-funds models by these analysts. (At this point I urge anyone considering commenting to read the blog at the very least, and the full paper if possible).

Given the similarities of the housing and credit boom in the U.K. and in Ireland to what happened in the U.S. it is clearly of relevance even to a narrow discussion of the Irish economy (as well as to the field of macroeconomics in general.) I think the paper has a number of important implications not just for the historical view but also for how we think about the current situation globally and in Ireland, which is why I asked Philip to mention it. Two conclusions that struck me to start the discussion.

First, one must immediately be skeptical any current forecasts of the U.S. or global economies (either for recovery or otherwise) emanating from those whose models so clearly failed to anticipate the current crisis. Conversely, we should pay close attention to those economists whose analytical approach has been vindicated by recent events. In a longer-term sense it suggests a serious adjustments ought to be made to the reigning macroeconomic equilibrium models. Closer to home, it begins the question whether anyone is analyzing the Irish economy in these terms? If not, why not? And why should the policy recommendations or forecasts of economists using equilibrium models be trusted by the general public?

Second, the analytical separation of the FIRE sector (financials, insurance and real estate) from the real economy appears to at least suggest implications for policy and for regulation. In some ways, you can see this as a supporting leg to the Baseline Scenario’s strong advocacy of a new and far more restrictive regulatory stance towards the financial sector. More broadly, this analytical separation provides the opportunity to think more clearly about what is good in policy terms for the real economy without including the financial sector in that evaluation.

The link to “letter to the Queen” seems broken btw.

@Mick – they can do that deep-dive because the Icelandic Financial Supervisory Authority is in control of all three banks – not a scenario envisaged under NAMA.

It is right that this subject should be raised, especially in the light of Colm’s call for an enquiry into the failures in the banking system.
In my view one of the important failures which occurred was the failure of the economics profession in Ireland to give a credible, consistent forewarning, in a manner which wd bring about behavioual change, or even an high-profile debate, to our community about the nature and size of the macro-economic imbalances which were building up, especially prior to 2006, when the credit bubble effectively peaked-in terms of annual growth in credit. Although there may have been isolated cases, ( a very well-researched Barrington prize paper by Allan Kearns to the SSES and Patrick Honahan’s 2006? paper about the Net External Liability of the banking system to the Kenmare Workshop, come to mind)( and certainly, commentators such as David Mc Williams were very vocal) I cannot remember any prominent member of the profession, or institution providing credible consistent warnings about the credit bubble and the associated macro-economic imbalances. Indeed my impression of the period is of all the official institutions, Central Bank, IMF, OECD(cept for the famous incident of it rowing back on it’s concerns about house price growth at the urging of the Central Bank-when-in 2006?) ESRI, university economics departments (Ricardian equivalence, Maynooth report justifying house prices?) issuing reports with comforting language about demographics, fundamentals, etc which conditioned, the public debate especially when combined with the cheer leading behaviour of certain private sector economists, which typically received prominent media coverge.
The imbalances were enormous-objectively.
In 2006 credit grew by 67bn against a start of the year GNP of 140bn but even in 2004 credit grew by 37bn. (one of the rhetorical devices used to de-emphasise the size of the bubble was the use of GDP rather than GNP in measurement metrics, which of course understated by reference to other countries any comparisons of this nature by 20% of GNP- a big figure).
I do not believe there has been an example of stronger growth in credit relative to GNP than this, historically, in OECD countries.
The largest stock of credit in any other country of the developed world does not exceed 200% of GDP, a figure (GNP) we exceeded in 2004 or 2005.
The financing of this borrowing created a reliance on cross border interbank borrowing to the extent of 120bn (80% GNP)in the Autumn of 2008 which had been gradually building up since the early years of the decade. This turned out to be the fault-line and has now been substantially replaced by borrowing from the ECB.
The growth in credit drove property prices into the stratosphere (now down 50% across all sectors) and construction output to 23% of GNP in 2006 against a typical range for other countries of 5%-12%. This latter level was clearly unsustainable and it was inevitable that the process it returning to a normal range wd remove 10%, at least, of our economic output.
Why was there no comment on this obvious point.? The bubble which occurred in Ireland was the biggest, in relevant history (say in the OECD since the second world war) and had been building up for many years. Where was the contemporary exploration of and commentary on, the elements of this?

I think Colm McCarthy has come to realise that Irish people are not ready to accept the Bord Snip proposals because people are unwilling to take the pain when those responsible for this mess are being bailed-out or given golden handshakes.

We need to start from a shared understanding of how we got into this mess and we then need to hold those responsible to account. I have made this point on this site and elsewhere but there are many posters who are very anxious not to look back.

And let’s be honest here. Most Irish people were cheerleading the property bubble, the construction boom, the easy lending and profligate public spending. When Charlie McCreevy tried to bring public spending back into line in 2003, the next year FF had their worst election ever (until this year of course).

That doesn’t absolve those who were responsible but we need to realise that our problems were not limited to a few individuals and the cure will, of necessity, be unpalatable for a broad range of people.

Today’s Indo has a thoughtful editorial supportive of the idea. It doesn’t have to turn into a lawyers’ carnival. Provided the inquiry avoids issues of personal liability it need not run foul of the Superior Courts and, like The DIRT enquiry, its costs could be easily recouped by the Exchequer. The great danger is that an Oireachtas inquiry would be used for party politics.

@Mike Costigan, the Bezemer paper has lead to much discussion on the internet over the past month. In fact Chris Cook, who occasionally posts here kicked off quite a debate on the FT’s blog http://tiny.cc/KbA78

The following passage is from that discussion:

“In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur — a tremendous rush for means of payment — when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realised again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production.”

Originally written by Karl Marx, published in 1894. I guess the crash was so big it could only be seen from a long way off. 115 years ago seems to be about right..

there was a letter written to the SEC from 80 professors in the US asking for a change to the rules surrounding appointments of directors to banks

ups to @stephenkinsella for the link


I think one of the main lessons is that of enforced governance, in ireland most of the people who felt we were in a bubble were all central bankers, that might match in well with the flow-analysis as they would likely be focused on such stats, but because they failed to act it meant that industry (acting totally irrationally at the time) continued on the roller-coaster unabated.

as for a ‘public hearing’ i think that is PR more than anything, did the public galley hearings of Fuld in lehman or Applegarth in northern rock made zero difference, it didn’t even whet the public appetite, if there is any hearing skip the bullshit public tribunal, do it in a court where there are serious outcomes

@Mike Costigan
I have been reading Professor Steve Keen’s blog at http://www.debtdeflation.com/blogs/ since the blog started in 2006. It’s well worth a browse for anyone interested in understanding the present economic trouble. As he might say himself it’s the bloody debt (particularly private debt) stupid.

He has strong views on the inadequacy of the standard economic models. He particularly critises them for their excessive dependence on static modelling and how they tend to ignore the central role of credit and debt in the economy.

This is how he describes his view of money:

“As an economist, I do something very unusual: I treat money seriously.

Though this may be hard for those who have not done an economics degree to believe, economists have it schooled into them that “money doesn’t matter”–that it is just a “veil over barter”, there to make it easier to swap commodities than it would be if you actually had to find someone who had what you wanted, and wanted to sell what you wanted to buy.

The argument that persuades them goes something like this: ”what would happen if you simultaneously doubled all prices and all incomes? Nothing!” In other words, if consumers are rational (now there’s a much abused word, but I digress), they shouldn’t care about the absolute prices of goods, just their relative prices. So doubling all prices and doubling a consumer’s income shouldn’t cause her to do anything different (but of course, changing relative prices would alter behaviour).

Bollocks. Double all prices and my income, and I’d be much better off because my mortgage payments would take less of my income (even if interest rates were also doubled). That’s because I’m in debt–I have a mortgage. And you can’t simply double interest rates to reach the same outcome as doubling prices, because debt repayment dynamics make the whole thing “nonlinear”: include debt seriously in your analysis of consumption, and the “veil over barter” vision of money collapses. But this “inconvenient truth” is omitted from economics–not because economists are deliberately hiding it, but because they have deluded themselves about the nature of money.

I take it into account, and as a result I get a very different picture of how the economy operates than do conventional (”neoclassical”) economists.”

Anyone for a paradigm change in economic theory?

In calling for an Oireachtas inquiry into the banks I suspect Colm McCarthy is justifiably concerned that there will be insufficient public acceptance of the drastic fiscal adjustments that will have to implemented over the next few years beginning with December’s budget. Again I suspect that Colm’s fear is that if appropriate steps aren’t taken the judgement of the markets will be harsh and the fiscal crisis will deepen to the point that national solvency will become an issue.

The boil that is the banks must be lanced, but the principal reason I have expressed doubts about the effectiveness of an Oireachtas inquiry to achieve this are concerns about the powers, terms of reference and timescale of such an inquiry. The due process that is inherent in the effective conduct of an inqury is not compatible with the urgent requirement for major policy decisions. Since last September most other governments have not had inquiries; they simply got on with trying to solve the problems in front of them – even though many had been in power during the long run-in to the blow-up and, in the eyes of many of their voters, were complicit. As a result they are beginning to see some signs of success.

A power hose is needed to clean out the stables in Ireland and the only agency capable of applying this are the Irish people in a general election – even if they might be under-informed and prejudiced in the views of the “experts”. Trusting the people is the basis of democratic governance. It’s time they were asked to exercise their power.

@Karl Deiter
Yep karl I agree, tribunals are for wimps!
We need proper court actions taken against wrong doers.
A reluctent purging of sins doesnt cut it.

@ Lorkan RK
The list of Economists who saw it coming on Chris Cooks post is not very legible.
However I did make out Roubini (Dr. Doom) and Peter Schiff.

So the next obvious question is, do these guys have similar expectations for the future?

I know Roubini sees a double dip recession from a CNBC interview he gave a month ago.
Schiff is always pesimistic on equities and I know that he sees devaluation of the dollar, however since his business is centred around trying to increase the value of gold it is hardly surprising he tries to beat up on other attractions for investors money.

Others like Marc Faber say the recovery is based entirely on increased liquidity and that “The big crash has not happened yet”

Anyway is there any kind of consensis among those who had it right last time.

Also i dont think it is fair to say that Dave Mc Williams was the only Irish economist to see the crash coming.
I guess that people dont listen to economists as much as economists would like. Perhaps because they disagree so much? But even when they do broadly agree (the letter from the 20 in April for example) the government have shown it is fairly easy to dismiss them.


Thanks for the Marx quote – From the 1894 date, he must have had the Panic of 1890 and the near-coolapse of baring’s in mind.

The description of the swindlers and speculators sounds simultaneously just like Trollope and The Way We Live Now on the one hand and noughty Ireland on the other.

The Robert Lucas defence that the models didn’t say there wouldn’t be a crash – they only said what would happen if there wasn’t a crash – is a fair one, but how much emphasis was put by the macro modelers on that assumption particularly as the scale of global imbalance approached the heroic.

The letter to H.M. Q.E.II is interesting.
Did little old Liz Windsor actually ask the disarmingly simple question?
The conclusion is well put.
“So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

Given the forecasting failure at the heart of your enquiry, the British Academy is giving some thought to how your Crown servants in the Treasury, the Cabinet Office and the Department for Business, Innovation & Skills, as well as the Bank of England and the Financial Services Authority might develop a new, shared horizon-scanning capability so that you never need to ask your question again. The Academy will be hosting another seminar to examine the ‘never again’ question more widely.

We will report the findings to Your Majesty. The events of the past year have delivered a salutary shock. Whether it will turn out to have been a beneficial one will depend on the candour with which we dissect the lessons and apply them in future.”

Speaking as one who accepted the EMH and has been humbled by the consequences, I found the discussion by Buiter of the linearisation of non-linear relationships (beat them up in the basement with a hosepipe) and necessity with current mathematical tools to have a future time boundary influencing current asset prices to be fascinating.

In another life, I modelled mathematically the tides in the Irish Sea. In an early version, I had 900 metre high waves on the north side of Lambay before the model exploded. In order to get the model to work, I had to change some the mathematical modelling. It is very easy to get sucked into compromises that make the results turn-out ok but have less and less to do with the real world.

I now live about 4 km from the coast and at an elevation of 30 metres, so I don’t take my early model too seriously, but it was only years later that I found myself semi-stranded in a small sailing dingy with no wind in a tidal race north of Lambay and metre high waves caused by the race, so my model wasn’t all wrong.

Overall I think the response of the Fed and the BoE, and their success in the face of looming collapse, shows that when the conventional models no longer worked, they followed Keynes’s advice and turned to different models.
Their ability to change is reassuring as familiarity with the Kuhn’s The Structure of Scientific Revolutions would have suggested that the participants would have gone to their graves holding on to their old models, and that we would only have recovered when a new generation would take over.

Maybe there is merit in a time of crisis in there being more opinions in economics than practitioners.

Fraud: “The crime which may involve a false pretence ,false accounting, forgery, embezzlement or fraudulent conversion. Fraud is also the tort of deceit.” Murdoch’s Dictionary of Irish Law.

Fraud involves creating trust in the victim and then betraying that trust.

How much fraud has been committed by the senior executives in the Irish banking system during the exposive stage of the recent credit boom? Why should these banks get a red cent from the Irish citizens (many of whom are in serious financial debt) when there has been very little evidence of criminal investigation, much less prosecution.

The American experience is a useful guide on the banking culture at the very top in recent times. The recent presentation “The Great American Bank Robbery” by William K. Black , , the former litigation director of the Federal Home Loan Bank Board who investigated the Savings and Loan disaster of the 1980s at UCLA, California is sobering. You can it view at http://hammer.ucla.edu/watchlisten/watchlisten/show_id/128429/show_type/audio?browse=none&category=0&search=

@ Paul Hunt
PAC is used for a non solution, that will satisfy those who do not think for themselves.

Steve Keen is a national treasure. But there are others, in the USA, who are of an Austrian bent. They saw it coming and as inherent in a banking system where there are inadequate controls on those who govern. A recreation of the Law situation in France. Thomas Jefferson said many things of banks. All true.

The point is that bankers can actually end up owning most of a host society simply by providing capital to front companies that encourage trade in assets upon which loans are extended. It is then a kiting game. Pass the parcel. Those who withdraw their capital early save it. The rest end up exposed as Marx said, in swindles. TPTB saw this coming for years. Years. That is one reason for the carbon is a pollutant angle. The increase in credit in the USA is obvious from the graphs and starts in the 70s. Instead of stopping the dot com swindles they joined in and hen, obviously they failed, extended the creation of credit by lending to those who could not afford it, secured on housing. This article by the wsj shows why no one warned: the msm were in on it!
Spitzer warned people and was ruined! The US federal government were telling stats to loosen the restrictions on lending ….

If you relied on the msm, you were misinformed. Too many people were making money out of selling rubish and ruining everyone. Only those who took a measured view were able to see what Joseph Kennedy saw: too many who were ignorant and would be ruined, were involved. The Wall St institutions were run to ruin investors. Stockbrokers et al only make money if there are sales and they never encouraged people to sell as they would not make money out of that. There has been a stream of government incentives to inverst in the stockmarket. OPM by the bucketload. The system was entirely corrupted and very few could credit that. Sorry for the pun. For a dark side reading of what was going on, read Bob Chapman and Marc Faber. http://www.theinternationalforecaster.com

The problem now is not to tell the stupid that they were lied to. It is to stop the waste of what precious capital remains in Ireland.

Regulation is not needed for the next decade. There will be no lending as the economy continues to deflate. Sad news but you all bin took! Stop wasting capital! Stop listening to the msm!

Vote with money by paying off debt or walking from mortgages. Vote against incumbents. Vote by moving to a less corrupt and expensive country. I can recommend Australia!

It is inherent in our banking system as eventually, it becomes too large to support itself, like any other Ponzi scheme!

@ Aidan C
True. The S&L was known to be a chance to borrow over large amounts and invest. If it paid off, then pay off the loan and walk. If it did not, then just walk!
Impunity cos too many saw the opportunity and it was swept under the carpet, but the taxpayer had to pick up the tab.

Sounds familiar?

@ Mick Costigan
“First, one must immediately be skeptical any current forecasts of the U.S. or global economies (either for recovery or otherwise) emanating from those whose models so clearly failed to anticipate the current crisis. Conversely, we should pay close attention to those economists whose analytical approach has been vindicated by recent events.”
Nouriel Roubini said that what convinced him that a bust was imminent was the sight of rows upon rows of finished unoccupied houses on the outskirts of Las Vegas where he was attending a conference. So, apart from models, common sense is obviously important. He now forecasts a double dip recession and it is increasingly obvious that all is not well despite the trillions of direct and indirect stimulus spending in the US. His analytical approach is worth watching.
On the home front – where is David McWilliams?

“US banker found guilty of fraud ” BBC 18 August 2009 http://news.bbc.co.uk/1/hi/business/8206522.stm

“The defendants’ fraudulent misrepresentations saddled investors with unknown risks they did not bargain for,” said Benton Campbell, the US Attorney for the Eastern District of New York.

Butler and Tzolov deceived a number of corporate clients including drugmaker Roche, semi-conductor business ST Microelectronics, and Canadian fertiliser firm Potash Corporation.

“It was a bait-and-switch scheme,” said Assistant US Attorney John Nowak.

“They deceived clients who had trusted them.”

I think Philip Lane is raising a number of extremely profound questions which need to be debated. Finding out why the problems were ignored for so long might help to prevent a recurrence.

What interests me is that many economists raised questions about what was happening, but they weren’t listened to.

Of course, it was easy to write off some of them as cranks because they were. Googling “economists who warned about the crisis” produces a useful list.

But there a significant number of economists who issued warnings from within the academy but were ignored. Wynne Godley is an interesting case in point – he was an “establishment” UK economist who began warning in the 1990s about the huge emerging imbalances in the world and particularly the US economy. The impression I have is that he was shunned in Britain and has ended up teaching in Bard College in the US. By the way, Bard developed a great website with a huge amount of [sceptical] analysis reflecting Godley’s approach , most of which has been widely and studiously ignored. He has a website: http://www.wynnegodley.com.

I’m afraid this is a psychological rather than an economic problem.

This is a very old debate. Charles MacKay in his “Extraordinary Popular Delusions and the Madness of Crowds” published in 1841 is still worth reading – in fact, I suspect that it wouldn’t take a lot of changes to re-issue it as an analysis of what’s happening now.

Unfortunately, if MacKay is right, there’s probably not a lot that can be done.

Lessons are learnt by one set of policy-makers, but then “a new paradigm” comes along and everything is forgotten. The US went through the Depression, reformed its banking and regulatory systems to deal with the problems the crisis revealed, only to undo most of those reforms in the 1970s and allow a move into what could be a re-run of the 1930s.

As MacKay realised in the 1840s, a widely held belief that certain assets will increase in value [he had tulips in mind, but of course substitute property in Ireland’s case] can produce that increase in value. In the early stages, money can be made because you can sell the tulips to other people – so to that extent, its rational for some people at some point to buy and sell tulips. The madness starts, of course, when large numbers of people believe that the price will continue to rise forever.

MacKay saw that the madness is supported by rationality. This mixture of sanity and insanity gripping large numbers of people is compelling and probably impossible for individuals to resist, especially when the lure is wealth [or a place to live]

follow upon that story-
The Nigerian central bank has threatened legal action against defaulting customers of five banks rescued in a $2.6bn (£1.58bn) bailout.

The central bank published a list of more than 200 customers, including companies and state governments.

Nigerian police have arrested four of the banks’ chief executives after all five were sacked last week.

The bosses are being questioned over the bad loans taken on by their banks which totalled $7.6bn.

Can the Nigerian teach us.

Where should one start? — from where the fish rots: poor governance with limited accountability in a multi-seat system with clientism and pandering to vested interests dominant, in a culture where plundering the public purse is far from a vice; political parties relying on soundbites, rather than detailed policies and then in government outsourcing on grand scale to the consultancy industry while responding to events only when there a crisis, or more often than not, a dire crisis; cronyism; Victorian era secrecy benefiting the insiders; a culture where the supporting cast within the system, keep their heads down, accept benchmarking whether its is viewed as a sham or not – – a few years later in 2007, partake in another pay bonanza with the SG of the Dept of the Taoiseach getting a 25% rise.

It is worthy of note that despite the reckless mismangement, nobody saw fit to resign on a point of principle from teh ranks of the senior civil service or the Central Bank.

Within the official circle was the State broadcaster RTÉ – – the political leaders’ preferred route to the public. The ineffective format of the Dáil, coupled with 2-minute door step interviews and a compliant RTÉ management coasting on an advertising bonanza, meant that there was never a risk of having to give what could be termed a forensic interview – -unless it was a self-serving response to a tribunal leak.

As regards economists, the academic economists may have had a disdain for the some of the prominent financial service economists, who were essentially well-paid PR men for the moneychangers, but these people provided the “intellectual” support for the boomsters.

In 2004 Bank of Ireland’s Dan McLaughlin had declared a “Golden Age of Construction,” at a construction industry dinner and then in 2007, said “there are a number of economic viewpoints about the Irish economy which are often voiced but have little in the way of support from the facts. One often hears that growth is unbalanced but a glance at the data from 2001 to 2006 shows average GDP growth of 5.3%, with all components growing in a 4.5% – 5.5% range.”

A year before, the myopic economists at NCB had produced their 20/20 Vision report, and again underpinned the fantasies of the politicians.

In June 2006, I wrote the following:

1. Foreign companies were responsible for 87% of Irish exports in 2005. 

2. Dell and Intel are Ireland’s biggest exporters.
2. Irish investors ploughed €30 billion into local and overseas commercial property in the past 5 years.

3. Investment of €133m has been made in 75 Enterprise Ireland supported companies since 2001. 

4. One in five Irish private sector workers are dependent on construction and more than 100,000 will become unemployed within 10 years.

4. No Irish-owned company has floated on the Nasdaq Stock Exchange since 1999.
5. Most workers in Irish-owned companies have no occupational pension. 

6. The Irish Government awarded special pay increases to all current and retired public sector workers, including politicians, in return for a benchmarking performance system. Targets introduced are basically unmeasurable and aspirational.

7. William Prasifka, the chairman of the Competition Authority, recently said that “in too many areas, Ireland has not willingly embraced competition.”
8. New Irish housing units are among the most expensive and the lowest quality in the Developed World
9. Since the end of 2003, output per worker in Ireland has been almost static.
10. Most foreign companies will have relocated from Ireland by 2025.
11. In 1970, Ireland’s national debt was as healthy as it is now: just ten years later it was one of the worst in the world

“Quite interesting” is not the adjective I’d have chosen. Depressing maybe, like some sub “Yes Minister” farce. Endless pass the parcel, lack of accountability, who cares it’s only taxpayers money. It was the central bank’s fault ? no IFRA’s fault. No the regulator’s fault. Don’t forget why this two (three ?) pillar system was set up – to accomodate faction fighting in the civil service. But not to worry, the banks are insolvent, over 250,000 people in negative equity and rising, unemployment set to hit 15% but these guys will all keep their jobs, their benchmarking and their gilt edged pensions.

As far as I am concerned the key to the mess that the Irish bank’s find themselves in is as follows.
In 1996 the lending criteria for a mortgage was as follows.
2.5 times the main income and 1 times the second income. the maximum term available at that time was 25 years max,and a 10% deposit was required.
If this standard had been maintained there would be no mess.
So my question is who was responsible for relaxing this criteria?
was it The central bank?, was it the regulator?, was it the DOF? was it the Government?
I guess it’s pass the parcel time again.

To return to some of the points raised in Philip’s initial post, I spotted a review of “Wall Street Revalued: Imperfect Markets and Inept Central Bankers” by the British economist, Andrew Smithers:

A key contention is that stock markets are “imperfectly efficient” and fluctuate around their fair value. Smithers basic argument is that central banks should watch out for signs of “irrational exuberance” and nip it in the bud by increasing interest rates and/or raising capital ratios. Since central banks put a lot of effort into identifying the “output gap” when setting interest rates the argument is that identifying a sustained gap between actual and fair market value should not prove excessivley onerous. Perhaps this is an area where economists could be profitably and usefully deployed.

@Paul Hunt with regard to increases in Capital ratios I think Patrick Honohan says it best from His excellent paper. Quote: “It was around this point that the Regulator tightened capital
requirements, requiring “banks to set aside much more capital” in relation to
high loan-to-value ratio loans (Neary, 2008). But how much more capital? The
regulation of 31 March 2006 increased total capital required to back a 100 per
cent loan-to-value ratio mortgage from 4 per cent of the loan to just 4.8 per
cent – a negligible increase of just €4,000 on a loan of €500,000.” With regard to “irrational exuberance” I would refer to the same paper by Patrick where He highlighted the growth rates for Banks over a 10 year period and How Banks showing growth rates of over 20% should have set off alarm bells.A look at Anglo in particular during this period beggars belief with growth maintained even through the dip of 02/03….Now having read the complete transcript of Kevin Cardiff et al before the PAC it seems very clear to Me in any case that the Regulators Office was set up to Fail,given that it was UNDER resourced in terms of availeable Expertise,staff, and what I would describe as its “Mission Statement”.I say this because it appears to be the case that the Banks were producing data that was NOT being independantly verified by the Regulator.To be more blunt “light touch” became “soft touch”…. While I have been following events in Ireland for some years now ,I have come to this conclusion,which might be controversial,but it is this …the property bubble was allowed to inflate and draw in more Capital,Mortgage holders,and eventually the Government and ECB to cover losses in Irish Banks that I believe may have been insolvent as far back as earlier in the Decade.While I might be accused of cynicism or supporting conspiracies,I will contend that everything that has emerged in recent times regarding Corporate Governance or lack of among the Banking classes in Ireland can only lead one to believe nothing from their mouths,accounts,reports,etc. Im sorry if this offends some people,but the absence of any Rational explanation as to how Proffessional Bankers did not recognise a property bubble given the Global History and many examples of such availeable for study just does not wash with Me. I am broken hearted for the Country I loved and to think of how a property bubble was used to gamble for ressurection is just the final straw.

@Ciaran Daly, I don’t agree that Nassim thinks projections are pointless.

I think his point is that assuming an unwarranted degree of certainty from a projection, and hence changing current behaviour to reflect that, in the face of large and unforseeable events, is not a good idea. Projections can be quite a good thing in a Black Swan world, especially if they are mostly conservative and partially extreme. It’s a bit self serving, but I’ve a pre-canned rant about it all here: http://tinyurl.com/nyokla.


I’m sure many share your anger and sadness. Although the Irish banking and financial crisis has features that differentiate it from that in other developed economies – and I think these have been pretty well documented – you seem to have hit on one that, perhaps, has not received much attention in your contention that “the Regulators Office was set up to Fail”.

The US and Britain, whose banks were most involved in, and affected by, the credit crunch, used to have reasonably effective systems of financial regulation until they were progressively dismantled in the late ’90s. In Ireland there was never any serious commitment to effective financial regulation – or regulation in other economic areas. All modern developed economies had high profile regulatory and competition bodies – the OECD and the EU were particularly keen on them – so it was seen as necessary to develop and establish a raft of these bodies and to have all the trappings, but it was all a facade as there was never any political or policy intention to have them operate as most regulators operate (or try to operate) in other jurisdictions.

Regulatory responsibility was often diffuse and under-empowered (e.g., financial) or subverted to pursue policy objectives (e.g., energy). Regulation was never going to be allowed to get in the way of businesss and profits. All businesses will seek to evade, limit or undermine regulation, but its necessity is grudgingly conceded and, frequently, poachers will become zealous game-keepers. But this is not the Irish way. As one wag observed of the CEO of an Irish business: “He could not see a rule or a regulation without trying to figure out a way of bending or breaking it”.

Most other countries are seeking to repair and reinforce their systems of financial regulation – with varying degrees of enthusiasm in the face of concerted bank opposition – and there is much for economists to get their teeth into, but we need a power hose in Ireland.

To my last post it is important to add that my advocacy of a power hose is not meant to imply that the staff in these regulatory bodies are not highly professional and dedicated public servants. The problem is that the political and policy constraints on the regulatory structures and processes prevent them from carrying out the functions that would be consistent with the titles of these statutory bodies. The power hose has to aimed much higher.

And yet nothing has changed. Because our institutions are subordinate to whomever pays them off, they fail to act as institutions should. They know there will be no enquiry with teeth.

Nothing will change. OPM and TPTB get richer and the taxpayer picks up the tab.
There are no economists who admit that there is corruption in Ireland. They would never be employed by TPTB again. That was why there were no warnings!


Your points, as always, are valid, but it is probably unfair to berate economists. They, like everyone else, must operate within the existing framework of democratic governance and of the institutions established and policies enacted by this framework. This represents the consent of the people, freely given, to be governed in a particular way, but this is where the problem lies.

FDR pursued Keynesian policies from his inauguration in ’33 (in the face of opposition from the conventional wisdom which eventually compelled the adoption of a premature fiscal tightening) prior to the publication of Keynes’s “General Theory”. Keynes’s influence came later. Economists have no political power or influence unless those elected to govern choose to consult them or to take heed of what they are saying.

The political reality – and, therefore, the economic reality – is continued governance by those who played a major role in creating this mess (and who are determined not to acknowledge their responsibility) followed by a choice (which the current Government is determined to postpone offering to Irish voters for as long as possible) between a continuation of current governance or an alternative comprised of parties whose policies on substantive economic and financial matters (insofar as they may be observed) diverge widely. This is not an inviting prospect in the context of the major reforms that are required to clean up this mess and to resotre some measure of economic prosperity.

Therefore, perhaps, you are correct. “Nothing will change.” I’m struggling to keep a vague hope alive that some political rationality will emerge.

All well rehearsed, including Colm McC’s stuff. Is there any point in finding out why it happened unless we are commited to changing what needs to be changed after we have identified the needs?

OTOH, any sort of inquiry, even a cheap option llike the PAC, is very unlikely to identify any of the reasons in such a way that they could be fixed. How likely is it that McCreevy, Bertie, Cowan, Lenihan will admit to any error, any failing. Even less likely that past and present public servants will make any admissions, assuming they bothered to turn up.

The only way out would be to fight an election on the basis of proposals to change our ‘system’ As Finfacts implies, in a multiseat PR system is that likely to happen??

Bye, Barry

@Paul Hunt ,thank you for your considered response.It appears from a re-read of the DOF submissions to the PAC that they wish to return to the type of system that existed before the Regulatory changes which split the CB,and produced the offshoots of Fin.Reg / Fin Ombudsman.Great talk of Canadian type prudence and protection of the consumers but it all rings a bit hollow.Great emphasis by Cardiff on how the Fin.Reg. was independant of other Institutions and no mention of the fact that it shared Board Members with the CB. Cardiff went as far as saying the Extertise needed was not availeable and any thay had was poached by the

Contd::: Was poached by the Private Sector,which translates to ….”We need more staff and higher pay”.So My read of the DOF is they wish to return to the good old days and to forget as quickly as possible about this brief seperation of Powers. Central Bank and DOF hand in hand with a plethora of Consultants producing reports and briefs for Ministers that will be worded in such a way that even poor Mystic Meg will be Redundant.They will finish way behind the curve on any Financial innovations in the Markets and become the toothless Guardians of GUBU and MEMO speak and will bask in their own little nepotistic and croney world while the Economy bounces along the bottom scathering emigrants across the Globe as the World recovers and Ireland returns to the good old days of “the sick man of europe”.


We’ll talk ourselves into despair. What you describe is, unfortunately – and tragically for so many, highly likely, but I sense a growing recognition of the need for the power hose and radical reform after that. One has to live in hope.

@ Willie Slattery
Have you had your concerns answered? I believe I addressed them in my various posts before and after yours elsewhere on this blog, but then as I left the country in 2003 and have not been back since, you can guess what I said.

Leaving was my solution. You might expect an apology from those who undoubtedly knew, but you won’t get one. The system is designed to share out OPM. Other people’s money. When you enquire into why it happened and no one bar a few, told us it was going to happen, there are many blank looks. I noticed this before “it” happened and so did others. You will only find correct predictions and explanations on free media. Not the MSM. Just because it is free doesn’t mean it is twisted by an agenda. Just because you pay for it does not mean you get the truth. A very twisted society. Tortuous. Wrong. Corrupt.

Paul Hunt
Faith can move mountains …….. but voting and talking to others also work to change things. Why are there so few corruption investigations? Did those Tribunals work somehow? Or did they just show how toothless they are? An expensive waste of our money because we do not let the Gardai investigate!


I fully agree that allegations of corruption should be thoroughly investigated and, following due process, if proved true, appropriate sanctions should be imposed. But tracking down every allegation over the last 10 years could take another 10 years – and we don’t have that luxury. The power hose of popular revulsion expressed in a general election that would clean out the political stables and elect a government genuinely committed to radical reform is the best we can hope for. And a key reform would establish a ferocious statutory anti-corruption agency.

I don’t profess to any kind of an authority on the current crisis in the Irish economy but there is one truth of which i do know, the greatest collapse is yet to come and it is a worldwide currency collapse, first it will be the Dollar and soon after the Euro and if anybody thinks they have seen bad so far, just wait for the Currancy crisis. This government consigned Ireland to the scrapheap last year when they put our heads on the block to the tune of 500 billion by guaranteeing the banks and there’s no changing that now, every single Minister in this government will be remembered as the government of cronies who brought Ireland to it’s knees and we don’t live in a democracy anymore, the proof of this is the commitment the government has given to Nama and to fund to the tune of another 54 billion, the Irish people have a right to choose whether this goes ahead or not but this government will not allow that right because they know that every ordinary decent citizen of this country will not consign the future of our children and grandchildren to a life of debt to bail out banks which are broken and ruined businesses, let them go they are DEAD and should be buried. I know that lots of so called experts and economists will vehemently disagree with me but I am one of the 99% of other ordinary, law abiding, taxpaying citizens of this country and we are the country, we are the people and if we are wrong or we decide by voting wrong then so be it and we can’t argue with it but we have the God given right to vote on issues like this and we demand it!

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