Honohan Interview on RTE

Thanks Karl for linking the interview.

Cearbhall O’Dalaigh’s link here to Spitzer speaking on MSNBC (YouTube link) is a good interview.

http://www.irisheconomy.ie/index.php/2009/12/18/investigating-the-banks/#comment-28908

This idea Spitzer talks about is avoidance of being distracted by the ‘illegality’ arguments to do with mis-use of money and taking of money by illegal means. But rather to focus the attention on the fundamental lack of representation which the taxpayer is entitled to on such institutions as the New York Federal Reserve board. Getting back to this argument, Geithner doesn’t think he is a regulator.

There is nothing strictly illegal in that, and trying to solve this problem of lack of responsibility through means of a ‘legal’ type investigation (i.e. to catch possible criminals) would prove fruitless. It would enable to the directors of the Federal reserve system to continue operating without doing the full amount of their duties.

So this ‘illegal activity’ type of investigation it seems to me, seems to be an ideal way of avoiding dealing with the real problem at all. Sure white collar criminals need to be found and dealt with. We have encountered this point of view before at Irish Economics discussion – i.e. we need a ‘Madoff-style’ of approach to deal with criminals in Ireland.

But the pointing-fingers-at-criminal(s) type of approach seems to miss out on the real problem, by a mile.

As Patrick said last night, there is surely going to be an inquiry at some stage. Perhaps Cowen will delay the inevitable until such time as we have a new government, but it will just make him look worse than he already does.

No one wants another tribunal of inquiry, I am sure, and Oireachtas committees have very little power – even to compel people to appear before them. Hence, without new legislation (good luck getting that!), would an inquiry actually serve any meaningful purpose?

I think that it is self-evident that a full-blooded inquiry should be held into how we find ourselves in this unprecedented and extreme predicament. However, this is not a society that is notable for its adherence to principles of transparency, accountability, and social justice. Let us face it – there are many highly worthy reports gathering dust on shelves in government departments already – their recommendations largely ignored once the initial furore has spent itself.

I hate myself for saying it, but if such an inquiry would just be a whitewash or token effort, then there are better uses for public money right now. No point wasting a very scarce resource just to pay lip service to what properly functioning democracies do.

I found this sentence in Karl Whelan’s most recent Irish Times ‘opinion’ contribution.

“ECB president Jean-Claude Trichet has told the European Parliament that he wanted “to avoid a situation in which banks are heavily dependent on exceptional central bank financing” and that troubled banks needed to “restructure their balance sheets through recapitalisation”.

http://www.irishtimes.com/newspaper/opinion/2009/1217/1224260833035.html

One can understand the ECB’s point of view. It is bad enough I suppose the private sector in Ireland has been reduced to a sorry state where it barks in attendance to every bit of bone thrown to it through FF’s incentive-isation planning etc. Essentially we never had a market economy in Ireland. What we had was a very centrally driven, lame version of a market economy.

http://www.irisheconomy.ie/index.php/2009/12/20/profile-of-this-blog/#comment-28975

You can understand why the ECB doesn’t want to introduce another ‘macro- layer’ above that again, whereby European itself becomes a planned state/region. In other words, we must be careful so as not to breed the native instincts for enterprise and activity out of smaller member states over a period of time. That is why continued ECB support of capital supply in its members would be damaging over a prolonged period.

But in reference to the ‘Week in Politics’ program on RTE media – there was one interesting clip where Senator Shane Ross talked of the ‘circle’ that needs to be broken. The regulator being too close to the banks. Banks being too close to developers. Developers being too close to builders. Builders being too close to politicians. Politicians too close to Dept. of Finance who in turn are too close to the regulator.

We have to be careful now as we enter into a new European phase in banking that we do not institute these daft structures – which as Honohan mentions, are put in place to avoid risk – but turn out to be very poor at preventing it. This idea of NAMA as a means to distribute credit into the Irish system would have the hallmark of a ‘bad structure-al relationship’ between private banks, ECB and member state economies.

But as Karl so rightly pointed out in his Irish Times article – our politicians, in practically all of the Irish political parties – were all for putting in place a ‘deal’ with ECB, whereby credit flowed into our economy through means of a daft, dangerous and dodgy relationship structure. It seems to Irish like to build such structures.

That is the real answer to the Honohan question – the society behind the 200 hundred year old banking institution – the society seems to approve and like to build notoriously shaky financial structures. We have a lot to learn from the United States it appears. Maybe they build better foundations? We need to get out of the habit of building on floodplains and like some countries build things almost designed to collapse when there is an earthquake.

@ Kevin o Rourke

I agree. There is no way any Fianna Fail politician with links to any of Berties cabinets are going to announce a full and open inquiry of the type advocated by Prof. Honohan.

We will have to hope for a change in Govt. to see any movement on this one.

It’s a bit mental that there’s even a debate about whether there should be a tribunal into this mess.

@ Paul Hunt,

I think we need to be very careful that Ireland does not hope to build the same kind of a messed up system we had internally on our own island of Ireland, and try to expand that to repeat exactly the same mistakes at a macro European level.

Not that I believe the ECB will allow us to do that. But what I think the most recent chapter of our modern history, the NAMA project does highlight, that putting a couple of Irish politicians together in a debate about something, they will try to ‘export’ their own peculiarly Irish version of cute hoor-ism to our nearby European neighbours if left get away with it.

I think we aught to concentrate our efforts at contain-ing the virus on this small island of ours and not letting it grow. I am taking fun obviously here (not so much). What I say runs contradictory to Pat Honohan’s comment – we shouldn’t look at Simon Carswell’s book (2006) on banking frauds and assume that we are unique in some respect.

The quip about robbing banks, because that is where the money is. You could write Simon Carswell’s book about almost every country out there. But I ever so slightly disagreew with Pat Honohan. I don’t think that Ireland is unique in the sense of having financial problems. But what Karl Whelan’s article in IT points out – across our entire political spectrum, there doesn’t appear to be a great deal of difference, in that they all are lead by pressure from the constituency, to ‘fling up’ any sort of makeshift structure or deal as a temporary fix.

Of course, we all know what happens is the temporary fix gets bedded in, and no one ever bothers to fix it again. The best people of all to ask about this are software engineers surprisingly enough. They have vast experience with this problem. The famous software architect Alan Kay, who worked at the famous Xerox Parc Labs talks about ‘late binding’.

Basically that you have access to the engine to move and adjust things right up until the date where the product version 1.0 ships out the door. But we don’t use a late binding architecture for software. With the consequence, the best intentions are to fix the fundamental flaws in a product after version 1.0 has left dah building. But it never happens.

That is probably our biggest problem in Ireland. We have a bunch of politicians who are able to rush version 1.0 out the door. Then it becomes the occupation of later generations of economists and civil servants to attempt to fix the thing after, but most of it is bolted down tight, un-touch-able.

Newstalk are reporting that Brian Cowen is saying that he has no objections to inquiry. It should happen soon.

Interesting to hear Patrick Honohan’s comment that NAMA is “essential” to fixing the banks. He would have preferred more subordinated bonds but said that this was “a marginal issue.” His support for NAMA follows on from Saturday’s Irish Times article that the IMF are clearly very supportive of NAMA. The IMF’s chief banking expert Steven Seelig described the definition of long-term economic value as “masterful” and added that he “hoped you can retain this language” in the legislation.

http://www.irishtimes.com/newspaper/frontpage/2009/1219/1224260980146.html

Contributors on this blog have accussed the Government of spinning when they claim their banking policy has the full support of experts at the IMF, the ECB, the European Commission and others. Seelig’s comments look like yet more evidence that in fact these experts are fully behind the Government approach.

@ Karl Deeter,

I have heard this ‘eye on the ball’ argument before. It is a most excellent argument. It sounds very dynamic, like we need to be pro-active and keep moving. It reminds me of the kind of statement one often hears in the Irish construction industry – the party line in mid 2008 was, the residential sector is a dead duck – but guys like Dave Torpey instructed us faithful employees at Zoe, that we are ‘competing vigourously’ in the commercial sector.

Competing vigourously.

I’ll always remember the way in which he could deliver that beautiful phrase to a few dozen employees who were facing rapid extinction in the property industry. I actually believed it, I think. Another thing I believed at the time, commonly voiced in the same circles, was that the United States had ‘taken their eye off the ball’ and hence, Ireland had to pay for that by having to suffer with less (and more expensive) credit.

Our problems in the property industry could always be neatly explained by the fact someone else had ‘taken their eye off the ball’.

The real truth is, these phrases like ‘competing vigourously’ and ‘keeping the eye on the ball’ are only useful to manager within the property sector who want to sound dynamic and seem like they are grasping responsibility for a situation. When the truth is, they are only looking to find the fastest way towards the escape hatch.

It is like the argument that we need to find criminals and place their heads on spears. Again it ‘sounds’ pro-active and like someone is taking control, managing the situation. It sounds all very fine. But it still doesn’t help with diagnosis of the problems that Eliot Spitzer talked about, in the interview videos linked here by Cearbhall O’Dalaigh.

http://www.irisheconomy.ie/index.php/2009/12/18/investigating-the-banks/#comment-28908

A journalist at the Sunday Tribune I think writes some excellent material is John Ihle. Although I had to voice something of an observation here:

http://www.irisheconomy.ie/index.php/2009/12/18/safe-and-sound-banking-a-role-for-counter-cyclical-regulatory-requirements/#comment-28902

Again, it is a case of mis-diagnosis, of the story getting warped around. Of journalists merely repeating stuff they have read from other journalism. It wasn’t so much the US administration – the White House – realised the problem was ‘so large’. As the fact the unstable and toxic assets were un-identify-able, un-track-able, un-discover-able. The patient, the US economy was on the table, kicking its last throes and the Fed had to stick the needle someplace. Why not re-capitalisation?

These are the kinds of things that investigations can throw up. One of the most obvious break-downs to me, was the fact that George W. B had no working communication system on the faithful day in ’01, and had to resort to using a mobile phone. The story of 2008 was not dissimilar, in that, all of the prescribed steps to take in an financial emergency simply weren’t appropriate. Maybe we saw things happen in much slow-er motion in Ireland, but it still deserves to be recorded and set down somewhere for posterity to look at. I think.

I suppose we could talk about flooding in Cork city along much the same vein also. What exactly was the sequence of events which un-folded. There is still quite major dispute over that. The flood exposes the fact woefully that we don’t have rain gauges along the Lee catchment to understand the nature of the rainfall discharging into water courses. How many bug bears like that are waiting to be uncovered in how we run a financial system here in this country?

Fianna Fail will only have an inquiry when some poor unfortunate lackey dies.

Then they will have somebody to blame and with no consequences for the real perpetrators.

Standard policy for the most corrupt political party in Europe.

@Eoin,

Agreed on the view that it should not be a Tribunal along the lines of Mahon. However, a committee of the Dail is what is needed. What happened was a systems failure in government, reguation and corporate governance. What better than an all party committee along the lines of the DIRT Enquiry.

Unless we have some kind of political economy narrative about what happened, then there can be no consensus about what has to be done.

@ kevin denny

That might be what Patrick Honahan wants but the people of Ireland want justice.

There were crimes commited in our Banks. If you defrauded them you would be prosecuted and it would be called justice but when they defraud you and you demand justice it is called tedious recrimination.

We do not need an inquiry to find out what happened. Giving too much power to a chosen few is the reason for our economic demise.

Power corrupts.

We need an inquiry so the corrupt can face the consequences.

Then we will send a message to all those in positions of power. Do not abuse your position.

@ kevin denny

Personally, I am all for heads on plates, as you put it.

I would also like to see a few Perp Walks of Shame being done.

These Masters of the Universe need to be brought back down to Earth, with a big bang.

@kevin denny
Ah, I understand now. First we figure out what happened so it can never happen again… and then we put their heads on plates?!

Stuart Blythman writes: “I suspect the international experts have their fingers crossed just like everyone else.” Yes, I’m sure everyone is hoping for the best. Still, I’d have more hope if policies are based on advice from experts.

Karl Whelan writes: “Funny how anyone that can be dug up to support any aspect of the government’s approach is an expert while those who disagree are ivory-tower eejits.”

I referred to the IMF’s Steven Seelig as an “expert” because if you search the IMF web site you’ll find a long list of publications by him on banking issues as well as evidence that he has extensive hands-on experience in resolving banking crisis all around the world. I consider Patrick Honohan an “expert” for the same reason.

“Perhaps Patrick thinks this is a marginal difference with the government’s approach..” Perhaps Patrick Honohan thinks it’s a marginal difference because he thinks there is only a small risk that the subordinated bonds will not pay off.

“So, I disagree with the statement of Mr. Seelig as reported in this article..”
You’ve missed the point. It doesn’t matter whether you agree with him or not. The point I made is that you and others on this site have repeatedly accused the Government of “spin-doctoring” (your phrase) in claiming that the IMF supports their banking policies. You yourself told a meeting of the Green Party that you can read beween the lines and the IMF advice is nationalisation. But Steven Seelig’s clear support for the concept of long term economic value in the draft legislation (“I hope you can retain this language”) suggests otherwise.

Brian O’Hanlon

“But the pointing-fingers-at-criminal(s) type of approach seems to miss out on the real problem, by a mile.”

Oh no, it doesn’t!!!!! Panto season?

Spitzer was outed as he took on Bush for overruling state anti-reckless lending rules, by Federal regulation. The USA sub-prime was deliberate. Whether they foresaw the crash is debatable. What an enquiry in Ireland will reveal is that the regulators all knew of bank practices that were unlawful and dangerous to solvency. The penalties for this are unbelievably, merely commercial, civil, if at all. Only if there were bribes to look the other way is there criminal activity. The sad state of public affairs being what it is that is to be expected also.

We need anti-corruption agencies, if we wish this not to recur.

Karl Whelan

You write “Contrary to your suggestion…” I made no such suggestion. Quite the opposite since I said earlier that you “on this site have repeatedly” made these statements. The point is these statements were probably false, if the Irish Times story is anything to go by.

You write “the Governor has been clear that the costs of the banking crisis will be significant. Spinning about how we’re going to break even in the end is, frankly ridiculous.” You’re mixing apples and oranges. We may see NAMA break even and still the banking crisis cost a lot of money. If NAMA buys Anglo’s loans at a very deep discount, for example, such an outcome is quite likely.

The very pertinent question now, give that so many of the ‘bus drivers’ of the past decade or two admit the vehicle is now un-road-worthy (a fact that any good road cop will no doubt confirm) is how do we avoid a situation whereby Ireland has to load passengers back onto this same crocked out old vehicle?

How can we invent a new vehicle with better transmission and engine, which can take us on a different journey the next time?

The testimony that any inquiry is likely to throw up, will record the fact that the bus drivers say: Well I just drove the bus, I know it isn’t road-worthy. I understand that now.

The next step of changing the mechanics is what I referred to here:

http://www.irisheconomy.ie/index.php/2009/12/18/investigating-the-banks/#comment-28797

It leads us back into politics strangely enough. I leads us back into the motivations of the Green party in particular. This ‘green ajenda’ is so potent (in Ireland, the US and worldwide) that it may represent the opportunity to alter the plan going forward ever so slightly. Just enough as to disrupt the inevitable re-build-ing of that same old seudo-capital-ist machine that will probably break down again somewhere in the middle of this century.

Even a slight disruption to that normal working and implementation of the ‘plan’ might be good enough, to serve as a decent alternative and to carry us on a new journey. That would be the purpose of an inquiry I think, to provision ourselves with a slightly updated blueprint as we head back into the fray. Given that time is ticking, the old map or blueprint is always there to follow and will carry us a distance at least.

But there needs to be something different in the new blueprint. There is €300 billion of debt this small country has to work out. That wasn’t there ten years ago in 1999. Okay, we might have the equivalent earnings per capita as we had in 1999, and an extra 700k people. But there is 3 no. times the combined debt exposure.

@ Gary

Here was my statement on this blog about the IMF’s official position:

http://www.irisheconomy.ie/index.php/2009/07/03/the-imf-versus-the-20-economists/

Can you tell me what in this article is false?

One of the nicer quotes from the interview:

Bob Cringely: Wow. In retrospect, in developing the TCP/IP protocol, would you have done it differently? Is there something you wish you had done differently?

Bob Kahn: You know, that’s a question people often ask, and it’s very hard to answer because you have all the retrospective of the history to deal with. I mean, how do you think radio and television would have been changed if we had semiconductor technology and lasers back in 1900? You can’t run that experiment.

@Brian O’Hanlon: I accept that everybody has a bias, to the degree where we take something to be true and then it is a concrete fact in our minds, it gives the likes of Greenspan his point of reference and thus bad decisions are made, but the ‘undoing’ of capitalism is farcical, capitalism is the only system that has thus far been proven to work – where ‘work’ means that people are essentially free to do as they like in a society.

our failure was primarily (in my opinion) regulatory at heart, but the genesis lied in
1. a worldwide glut of liquidity
2. macro-imbalances (eg: US v China)
3. a failed model of derisking – we got to a point where risk was ‘hedged away’ and ever bigger leverage used to get results, sadly, the risk wasn’t gone, it was almost like some rule of physics, whereby risk cannot be created or destroyed, only changed from one form into another!
4. an over reliance on money markets (including repo’s etc.)
5. securitization taken to too far.

then somewhere at the end of the list is that of the actual bankers, but everybody seems to put them at number one. banks are the conduit of money, but the property boom wasn’t created by bankers, the explosion of balance sheets was within their control but in the absence of them being able to control their own actions – and there is a strong international case for believing this as banking dilemmas have been repeated elsewhere – show that when the chips are down, and the taxpayer is on the hook that the only culpable party in the room are the central bankers and regulators – banks can’t and won’t set out to protect us, so look first at why the protection we all paid good money over the years to obtain (funding for regulator & the justification of regulation being the avoidance of systemic shocks) protection we didn’t receive.

whistle-blowing needs to come first, as mentioned yesterday, why not give everybody who wants to make a statement about any wrongdoing they know of a month or two to send their statements into the CB – and industry will oust itself and do most of the leg-work.

the fact is, the good people in finance want the confidence of the consumer and would be more than happy to dob in the unscrupulous, but that isn’t the forum we are talking about, rather it is ‘public enquiry’ and 9/11 style investigations, that isn’t about getting a result, that is about appeasement.

Of course, if one subscribed to this particular thesis:

“In order to ‘keep one’s eye on the ball’ to use that great phrase, one had work the other and increasingly more important side to the equation – the home purchase – whereby the asset was appreciate-ing in value faster than the body themself could ever work.”

The only way to get ahead completely of the rest of the pack, was to afford several homes, and enjoy the spectacle as they all simultaneously rose in value!

I remember that old footage of speed boat racing from the early 20th century. In the beginning they combined a hull with a WWII bomber aircraft engine. Afterwards they became more ambitious, they multiplied the WWII bomber aircraft engine several times. The boat became all engine and the driver was only a speck standing at the rear of the craft with a steering wheel and this enormous wash extending out in a ‘V’ shape behind him.

I couldn’t think of a more fitting analogy for the typical home purchaser during the Irish Celtic Tiger property boom.