Academic Cassandras: Iceland and Ireland

Timely warnings were issued by academic commentators in both Iceland and Ireland long before the collapse.   On Iceland’s sidelining of its most internationally-prominent economist, see my recent book review for the Irish Times.  The Sunday Independent afforded me the chance, a few weeks ago, to review the policy concerns that I had been expressing over the last decade (see here).  I was not in any way a lone voice, but the space allotted allowed me examine only my own record.  I was particularly disappointed to see Minister Eamon Ryan coming out with as ignorant a reaction to academic economists’ interventions as Denis O’Brien’s.

12 thoughts on “Academic Cassandras: Iceland and Ireland”

  1. Frank, it must be very galling to be told by ignoramuses that you failed to forecast the crisis, whe the oppostite is the case. I think what they mean is none of the economists they listened to forecast it, which is a different matter altogether.
    In fact one of the great myths of the current crisis is ‘no-one saw it coming’. In fact, it was so widely predicted people got fed up with asking the same questions and making the same points. The number of academic economists who warned of this is large, yourself included. Personally, my own favorite outside of economist circles was Brenner’s, ‘The Boom & The Bubble’.
    Even financial journalists, who are not always as sceptical as they might be kept on asking Chuck Prince each quarter as the results were published, when Citibank was going to get out of the sub-prime, abs, cdo bubble, and elicited the famous response, “while the music’s still playing, we keep dancing”. The Times in London even ran a week-long series, in early 2007, on the bubble in financial assets. I attended a presentation in mid-2005 by a senior global strategist whose message was that the US housing market would collapse, that the bursting of the bubble would hit all financial markets, and that his own bank was one of the most implicated. His bank was Lehman Bros.
    Perhaps it is because the job of Prince, the strategist, et al is to carry on expanding the returns on capital that they accelerated through the red lights.
    But no-one except a charlatan or a fool can claim, ‘nobody saw it coming’.

  2. Not really on the “who predicted what” topic, but your last paragraph on how policy in Ireland is fomulated behind closed doors the lack of transparency reminded me of this story in last week’s SBP:

    http://www.sbpost.ie/news/ireland/almost-100-firms-avail-of-44m-state-support-44944.html

    ‘In a statement , Mary Coughlan, the Tánaiste and Minister for Enterprise, Trade and Employment, said the names of the firms that had received assistance from the Enterprise Stabilisation Fund could not be disclosed ‘‘for reasons of commercial sensitivity’’.’

    I’m open to persuasion, but surely in the interests of transparency a company seeking state aid should be willing to forgo a small bit of whatever is meant by “commercial sensitivity”? The idea that public money should be dispensed to selected companies (even as a loan, which is effectively the case with the ESF) but the public isn’t told which ones strikes me as odd.

    Similarly, as far as I’m aware we still have no information on the discounts applied to NAMA loans for individual financial institutions. Seems extraordinary to me.

  3. @Frank Barry

    Unless you have a media profile, you don’t matter.

    This is why Ryan would make such a statement.

    The financial service economists certainly were tin-can cheeerleaders of McCreevy and according to Finance magazine, in 2001, Goodbody’s chief economist Colin Hunt, who later joined McCreevy’s successor Brian Cowen as a special adviser said:”Minister, don’t let the doomsayers get you down. Economic policy is on the correct course and should not be altered because of the recent deterioration in inflation readings. Rather than tightening fiscal policy, you should continue with the supply-side approach of recent years with an emphasis on using both taxation changes to enhance the efficiency of the labour market.”

    Certainly the notion that everyone bought into the hysteria is either daft or self-serving.

    @James Conran

    A lot of this routine is followed because it was done in Queen Vic’s day.

    I was wondering earlier why does the Dept of Finance use ,000m instead of billion – the common usage and ditto the CSO.

    The New York Times has the quaint tradition of not using acronyms e.g. IBM is written I.B.M.

    Somebody must have said that’s what the rule book says.

    The Irish are very conservative and big professional firms who get lots of business from the public sector operate in a totally opaque system.

    The Government shields their business with it subject to some FOI requests, from public view and because partners are not subject to limited liability protection, no information on income need be disclosed.

    The public interest isn’t certainly served as competition isn’t enhanced.
    On use of public funds, several US States have introduced total transparency.

    In the Irish power structure, the only big change since 1951 is the demise of the Catholic Church.

    The trade union for the wealthy hospital consultants still calls the shots and most of the other vested interests remain in place.

  4. @ Michael Hennigan
    Surprisingly, one (at least) of the chapters of Colin Hunt’s PhD thesis was on the pro-cyclicality of fiscal policy in Ireland. Coincidentally, the 2001 paper I wrote with John FitzGerald that I mentioned in the Sunday Indo article made the point that developments in the Irish labour and housing markets meant that further income tax reductions would now impact primarily (and adversely) on the demand side, in contrast to previous tax reductions whose main (and beneficial) effects had been on the supply side.

  5. @Mark
    I would like to see economists who work for brokers referred to as share & bond auctioneer economists. Those who work for banks as loan auctioneer economists. I think this would alert the general public more about where they are coming from, which is not the foulest reaches of hell, but is not a position of total impartiality either. We all have our biases, but I think it’s fair to say that all these auctioneers should be declared as such.
    Economists who work for universities should be referred to as independent economists. I know that is not always true, but they are the closest things to independent economists we have got.
    Those for the government as government economists.
    Those for state research institutes as semi-state economists (I am open to revisions).

    @Frank Barry
    Thank you for trying to stop the insanity. As for Eamon Ryan, he was so aware of the coming collapse that he went in to government with both of the parties that caused it. Genius.

  6. Could we not set up a global list of all those who did warn that the bubble would burst, (you are allowed to nominate yourself) then post it to our political leaders? I’ll set the ball rolling with the most authoritative and then the most telling (in my view)

    *The IMF
    * Brenner

  7. One of my favourite characters from the bubble years was Henry Blodget, the Merrill Lynch analyst who would issue a public buy-note on a stock, and then privately dismiss the same company as a ‘piece of sh!t’ in internal emails.

    Many independent observers certainly knew the various bubbles were going to burst. But so too did many of the industry ‘experts’ who were motivated to say other things in public.

  8. @Pat The Plumber
    You are right. And Goldman Sachs doing better than ever. I hope that the next financial crisis is not remotely on the same scale.

  9. BBC Radio 4’s Thinking Allowed a year ago decided (!) that the only one who had predicted the crisis was Richard Dale, Emeritus Professor of International Banking at Southampton University, in a book he published in 1992:

    BOOK: http://www.amazon.com/International-Banking-Deregulation-Great-Experiment/dp/0631160574/ref=sr_1_1?ie=UTF8&s=books&qid=1256329212&sr=8-1

    PODCAST OF THE PROGRAMME: http://www.bbc.co.uk/radio4/factual/thinkingallowed/thinkingallowed_20081015.shtml

  10. Sorry but the evidence here that you predicted gloom and doom in 1999-2001 seems to reinforce The Ministers argument rather than refute it. The dogs in the street knew that there was a property bubble in recent years but with the notable exception of Morgan Kelly did any academic economist predict the extraordinary impact it would have on the banking system?

  11. @ Gaffer,
    We weren’t predicting doom and gloom back in the late 1990s, simply pointing to flawed fiscal policies that did indeed store up trouble for the future.

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