Morgan Kelly: “The Irish Credit Bubble”

Morgan Kelly has released a new working paper “The Irish Credit Bubble” – it is available here.

61 thoughts on “Morgan Kelly: “The Irish Credit Bubble””

  1. Forgive my flakiness
    But I went straight to the conclusion.

    “In the aftermath of this bubble, the Irish banking system faces three inter-related problems.
    The first is that it has made large losses on loans to property developers. The second is that it has large wholesale liabilities to international bond holders and, increasingly, to the European Central Bank. The final problem is that it faces likely further large losses on mortgages and business loans.
    The Irish government’s policy response has been solely to address the first problem of losses on developer loans by establishing a state institution to buy these loans. However, by ignoring the second problem of the large wholesale liabilities of the Irish banks, this project
    will inevitably end in expensive failure.”

    Quite bleak reading..
    Al

  2. @ Al: There have been no ‘losses’ – its virtual money, that is, there were numerical entries in a spreadsheet. Real money never existed – though it is now being printed at a furious rate. So if by ‘losses’ is meant future income, then yes, this is indeed ‘lost’ – in a virtual sense. What is real though, is the debt. Paying down debt extinguishes real money. This IS the predicament. Its negative GDP. !mooB. Just play it in slow-motion.

    B Peter

  3. @Al

    You missed some of the money quotes…

    My favourite:
    “The mounting losses of its banking system are facing the Irish state with a stark choice. It can attempt a NAMA II for mortgage losses that will end in a bond market strike or a sovereign default. Or it can, probably with the assistance of the IMF and EU, organise a resolution that shares property losses with bank creditors through a partial debt for equity swap. It is easy for governments everywhere to forget that their states are not wholly controlled subsidiaries of their banks but separate entities; and a resolution that transfers bank losses from the Irish taxpayer to bank bond holders will leave Ireland with a low level of debt that, even after several years of deficits, it can easily afford.”

    Forget nationalisation. Our sovereign debt is going to dry up anyway. We might as well deal with the bond-holders and have it dry up with lower levels of debt. A few years of paying the bills that we can actually afford will see us back from pariah status and crucially, we will have done it without reneging on actual sovereign debt.

  4. I hope it’s not too much of a side but as all this comes back to our weird obsession with property, can I ask your opinions on the property market? Do you think the following from the paper is accurate?:

    “This means that, supposing residential prices have already fallen 40 per cent from peak, prices still have to fall by about half from their present levels”

    “It will take about 50 years for real prices to return to their
    2006 peaks”

    Also does it seem to anyone else that the minister is only providing further ‘stickiness’ to prices by continuing interest relief to first time buyers until July 2011? With this in mind could he be accused of walking more poor sheep in to Negative Equity?
    Finally 2015 for the property market to rise again?

  5. From the paper:

    “We show below that the rise in Irish house prices has little to do with falling interest rates and rising population, and is almost completely explained by increased mortgage lending.”

    Peter Schiff’s November 2006 speech to the Western Regional Mortgage Bankers Association has a great explanation in it. (Available on YouTube)

    In the past, if you had some money you bought a house. But in 2006, if you needed some money you bought a house. His observations were based on living in California where he experienced the housing bubble take off there.

  6. Schiff also noted that in order to rent a home in California one had to go through all of this paperwork to ensure the landlord you were a reliably tenant. But if you purchased a house, you didn’t have to go through any red tape!

  7. WOW, the timing of the article below is perfect for the comment on page 24
    “This is not to deny that Irish banks may have exerted more direct means to control the political process
    but, until Irish members of parliament have to declare their liabilities as well as their assets, it is not possible
    to establish how many leading politicians received large, interest free loans from two banks”

    http://www.independent.ie/national-news/mccreevy-was-given-euro16m-loan-by-fingleton-1984611.html

  8. This paper should be considered compulsory reading by anyone thinking of trying to dip their toes back in to the property market as some of my friends, who were lucky enough to avoid purchasing in the last few years, are.

  9. I am up to reading page 11. I notice that figure 6 shows a line plotted for first time buyer mortgages against new house prices. The lines are almost exactly the same, despite coming from two different information sources. Fascinating.

    The thesis being that prices are effectively dictated in the market by size of lending to property purchasers.

  10. On page 22,

    “Among studies of the US sub-prime crisis, Dell’Ariccia, Igan and Laeven (2008) find that areas with the largest credit expansions experienced the largest declines in credit standards, while Mian and Sufi (2008) show that income and mortgage credit growth are negatively correlated across zip codes during the sub-prime boom of 2002-2005, consistent with the idea that an increased supply of credit rather than improved fundamentals drove lending.”

    This is why I find Peter Schiff’s lecture in which he uses California’s real estate bubble as an example often, so interesting. Schiff was active on wall street in the process of shorting on subprime loan instruments.

    But he used the California region as an example a lot in his lecture in 2006. California is one of the few regions in the USA, which does have excellent fundamentals, a lot going for it. It is a great economic driver.

    But what Schiff described in California is quite like Dubai, whereby the fools only worked, because the property earned multiples of times more than people could earn in a job!

  11. On page 22,

    “The destruction of the Irish entrepreneurial class may prove one of the most enduring and costly consequences of the property bubble.”

    I don’t think so.

    How Schiff described the situation in the United States – he might as well have been talking about Ireland. The enduring and costly consequence for Ireland, I think, is what Schiff is able to articulate so well. Ordinary folk got into believe-ing, that work for idiots.

    It is like he said, if you wanted money you bought a house. You didn’t work for money. Income became insignificant in the overall equation.

    The reason why Schiff can see it so clearly is based on the fact of his experience in the US technology stock bubble prior to it’s real estate bubble.

    With technology stocks there was a similar kind of ‘lay back and let the bubble do the work’ at play. Ordinary investors in stocks said, ah heck, earnings don’t matter because the stock price is going to continue rising anyhow.

    The exact same formula and system of beliefs was replicated in the housing market as in the Go-go internet (bubble) stock market.

    We didn’t get sucked into the stock market fantasy in Ireland in the late 1990s, but our export-ing and technological companies sure did experience a hit. We waded in up to our elbows when it came to property however and managed to do it every bit as good as California.

  12. On page 24,

    “The most likely reason is that Ireland’s credit boom was preceded by a decade of real, competitiveness driven growth. Irish lenders, borrowers, and regulators became accustomed to economic growth of 6–7 per cent that disguised the magnitude of the credit bubble that followed it.”

    I would not agree again.

    I find Schiff’s explanation, through his co-relation of the stock market bubble of the 1990s, to the subsequent real estate bubble of the 2000s, much more convincing.

    Even though Ireland did not experience the same problems as the California region did in the aftermath of the stock market collapse. Ireland somehow did manage to adopt a similar belief system with regards to working for a living (earnings) and real estate (asset acquired through credit). In other words, the asset’s rise in value far out-paced the typical Irish person’s ability to compete through earnings alone.

    The idea of the 1990s economic growth in Ireland disguising the subsequently growth in GNP arising out of construction activities is a nice way to look at it.

    But I honestly would be more interested in an Irish economist doing something based loosely along the lines of what Peter Schiff has done. To co-relate a technology stock bubble (which didn’t happen in Ireland) with a real estate bubble, which did certainly.

    No full-blown academic economist in Ireland, that I know about, has seriously done that study. And I doubt Peter Schiff has produced any papers either, as his major occupation is fund management/consultancy.

    Note, great reference to do with the California region and the aftermath of the 1990s stock market bubble.

    Artifacts: An Archaeologist’s Year in Silicon Valley
    By Christine Finn

  13. Here is a telling quote from the blurb to Christine A. Finn’s book:

    She describes a computer’s rapid trajectory from useful tool to machine to be junked to collector’s item. She explores the sense that whatever one has is instantly superseded by the next new thing—and the effect this has on economic and social values.

    In a similar fashion, in California, the home property began to fill the void for people in 2000s. Whereby, life, everything was speed-ing along and moving so fast. It wasn’t the computer that was rapidly being superseded. It was this sense of the home property – it, its value, its meaning was being superseded so fast.

    I would honestly challenge any person who lived in Dublin in the 2000s to deny the fact, there was this real feeling, that the pace of life just kept getting faster. Anything that was certain or normal yesterday, became superseded tomorrow, and again the day after. We are living in this kind of Silicon Valley trans-plant here in Dublin, Ireland. It is not surprising to me at all, that the ‘culture’ has also trans-planted itself into Ireland.

  14. Please do not forget that bank lending was uncontrolled and that the fiction that there were assets behind the lending was and is and will be the problem. It is all a Ponzi schem, a device that depends upon greater participation to keep the device working. When the numbers of new participants falters, then the device fails and the losses start. It no longer works when people do not borrow! It will not work for another 60 years or maybe longer. Kondratieff waves exist as they reflect human stupidity. Only when those who have seen it before are gone can it begin again! Given current longevity, which will soon decline, the wave may take 90 years.

    Using the credit system like a Ponzi scheme. It was deliberatley set in motion. It cannot be restared even as a carbon trading scheme!

    The Ieish were simply too stupid, as were the Icelanders.

    Instead of a change of management so as to rid us of the stupid, we continue to believe that banking will reassert it self.

    A new government and stopping NAMA in its tracks. It can and must be done and we can forego the mortgage on our future as B P W says the money is only being created now as it is a debt to the ECB to be paid off! The bond holders knew what was going on!

  15. Ah Pat, clearly you are unaware that “the best is yet to come” and “the bottom is in” and “the rate of decline of the second derivative has abated”…

  16. I do not think Morgan Kelly has explained the important role of the tax regime in creating the property boom. The tax system made it attractive for existing landlords to buy more property, even if they had to pay a large premium for it. This is what triggered the upwards price war. The fact that interest rates were so low just made the effect much bigger. The availability of credit was necessary to allow this to happen, but it was not a sufficient cause.

  17. To look at this quote again, from page 22,

    “Among studies of the US sub-prime crisis, Dell’Ariccia, Igan and Laeven (2008) find that areas with the largest credit expansions experienced the largest declines in credit standards, while Mian and Sufi (2008) show that income and mortgage credit growth are negatively correlated across zip codes during the sub-prime boom of 2002-2005, consistent with the idea that an increased supply of credit rather than improved fundamentals drove lending.”

    It could well be that Ireland, like California, did enough excellent ‘fundamentals’. It is hard to argue that Ireland isn’t lucky, extremely luck, with its ability to attract foreign investment and employment. We are definitely doing something right.

    Maybe the FF governments had something to contribute to that, maybe not. I don’t know. In any case, that discussion seems to have gotten lost in all of the ‘heads on plates’ or ‘heads of spikes’ frenzy.

    But what I do like about Peter Schiff’s analysis, judging by his lecture to be viewed on YouTube at least – is that you can have excellent fundamentals, you can be smack bang in the middle of the most vibrant, healthy, innovative economy in the United States – and still fall into massive trouble because of a credit bubble, an asset bubble.

    This brings us back to Ireland. Yes, the statement that Ireland’s ‘fundamentals’ are sound may even be valid, still, today in 2009 for all I know. But you can have that statement as true, and still experience the ravages of the credit bubble. There is the point. They are not mutually exclusive, and they never were.

    You don’t have to be in the middle of ‘string vest’ land for things to get horribly distorted.

  18. @ Antoin O Lachtnain

    Tax advisors were telling property speculators you have a choice you can either go out and buy another section 23, section 50 property etc., or else you can write an equivalent cheque to the Collector General. Most fell into the trap!

    Some people I spoke to around that time, were of the opinion that they were being “forced” to buy property they did not need or had no appetite to acquire. The government were constantly providing them with a way out of paying taxes. The way out was to load up on even more property.

    McCreevy himself borrowed 1.5 million in 2006 to buy a property that is now worth less than half what he paid for it then. Considering that he was minister for finance shortly before that, how good was his judgment? Yet he was feted with being a great minister and sent off to Europe as a reward for blowing the boom!

    The tax breaks were the petrol on the flames of the bubble . They were totally unnecessary and represented a complete failure and worse by those responsible for the future of the country. The state kept extending, kept increasing and diversifying the range of “tax breaks” available because they needed the revenue stream from property for the exchequer and perhaps needed the tax breaks themselves too.

    Ahern, McCreevy and Cowen all finance ministers during the boom were the ones dictating the future of the country. Unfortunately, they fed the public with platitudes about “soft landings”, told those who opposed their madness to go and commit suicide as they galloped the economy over a cliff. Now, they want to retain power at any cost, and will, as long as we go along with their latest madness which is no less irresponsible than their previous “policies”. It seems we must reach a state of national penury before we realise that there is a difference between barrister speak and sound policies taken without fear or favor for the good of the country not for the good of elites.

  19. The usual politically-motivated bilge from Morgan Kelly.

    Kelly’s entire thesis (namely that growth in the Irish economy since 2000 has resulted from nothing more than a bank lending bubble, property speculation and an artificial construction boom, rather than from manufacturing and exports) falls apart when we look at the figures for growth in GDP since 2000.

    In 2009, the bank lending bubble has burst and its almost impossible to get a bank loan, most of the property speculators are bankrupt, and construction output has fallen by half since 2007, to the point where Ireland will soon have the smallest construction industry in the EU as a percentage of GDP (although I predict that it will recover strongly in the next decade).

    So, if economic growth in Ireland since 2000 was driven almost entirely by these factors, as Kelly claims, then, given that they have all collapsed since 2007, we’d expect GDP in Ireland in 2009 to be back almost at its 2000 level. Agreed? Does anyone fault my logic there? So, let’s look at the figures for the changes in GDP in EU15 countries between 2000 and 2009 – these are from Eurostat:

    Greece – GDP in 2009 UP 34.5% compared with 2000
    Ireland – GDP in 2009 UP 30.7% compared with 2000
    Luxembourg – GDP in 2009 UP 29.3% compared with 2000
    Spain – GDP in 2009 UP 22.9% compared with 2000
    Finland – GDP in 2009 UP 16.5% compared with 2000
    Sweden – GDP in 2009 UP 15.5% compared with 2000
    U. Kingdom – GDP in 2009 UP 14.5% compared with 2000
    Austria – GDP in 2009 UP 13.9% compared with 2000
    Belgium – GDP in 2009 UP 12.2% compared with 2000
    France – GDP in 2009 UP 11.6% compared with 2000
    Netherlands – GDP in 2009 UP 11.4% compared with 2000
    Denmark – GDP in 2009 UP 6.0% compared with 2000
    Portugal – GDP in 2009 UP 4.8% compared with 2000
    Germany – GDP in 2009 UP 4.7% compared with 2000
    Italy – GDP in 2009 UP 2.2% compared with 2000

    note: all figures are for the VOLUME of GDP

    So, even after the bank lending/property/construction boom has totally collapsed (although I predict it will be a temporary collapse), we find that GDP in Ireland in 2009 is still UP by 30.7 per cent compared with 2000, a far larger increase than any other EU15 country apart from Greece.

    Doesn’t this tell us that there must have been a lot more to the economic growth in Ireland since 2000 than Kelly makes out? If, as Kelly implies, Ireland is the pits and Germany the tops when it comes to wise economic policy, how come Ireland’s GDP in 2009 is 30.7 per cent higher than in 2000, while Germany’s is a mere 4.7 per cent higher?

    I challenge Morgan Kelly to post here how he reconciles these figures with his oft-repeated claim that economic growth in Ireland since 2000 is little more than a property-driven sham. But, of course, he won’t. There is more chance of getting Osama Bin laden to engage in debate on this site than there is of getting Morgan Kelly to do so. But, if The Great One can’t be bothered to take up my challenge, perhaps one of his supporters will.

    Kelly’s basic problem is that, in relation to the Irish economy, he can’t tell the horse from the cart. It wasn’t the construction boom driving the economic boom. It was the economic boom driving the construction boom. Kelly simply can’t grasp this. Hence all his forecasts for economic growth turn out to be rubble. In March he forecast that GDP in Ireland would fall by 20 per cent in 2009. I forecast 5.8 per cent. If Kelly still thinks his forecast will be closer than mine, I’ll be happy to put on a large bet with him.

  20. From our Greatest Economist:

    “In 1720 the capital of public stocks and of Bubbles which were snares and enterprises of private companies at London, rose to the value of 800 millions sterling, yet the purchases and sales of such pestilential stocks were carried on without difficulty through the quantity of notes of all kinds which were issued, while the same paper money was accepted in payment of interest. But as soon as the idea of great fortunes induced many individuals to increase their expenses, to buy carriages, foreign linen and silk, cash was needed for all that, I mean for the expenditure of the interest, and this broke up all the systems.”

    Richard Cantillon: essai sur la nature du commerce en general.

    We’ve been served up the First Course only; the main part of the Recession Banquet is being ‘cooked up’ and will presently be served: less people working for lower wages, more direct and indirect taxes, negative equity, residential defaults and re-possessions.

    Please do not look to any of the current crop of politicians of any of the main parties to extract us from the predicament of real debt. The solution is a Debt Jubilee – a very disagreeable prospect. Absent a massive increase in real cash our disposable incomes will be completely inadequate to pay down the debt in an orderly manner. Eventually the decision may be between tantrums in a boardroom or disorder on our streets.

    Morgan Kelly has done the math – argue all you like about the result, but LTV ratios of 90% and above, or residential property prices of more than 4 times your real income lead to financial, social and political disorders.

    B Peter

  21. @Dreaded Estate

    Thanks for your questions.

    I think Morgan Kelly makes his hostility to FF pretty clear at all times.

    I have no connection with any political party.

    I have never even voted south of the border, having lived only 25 per cent of my life in the south. Had I, I would have voted FG up to 1987, but FF since 1992. But, that would have been on the basis of the parties’ policies on N. Ireland, not on the basis of their economic policies. I see no difference between FF and FG in relation to their economic policies. By the way, I mean that in quite a complimentary way to both. My main motivation in my posts is countering the damage done in the north to the south’s economic reputation by the likes of Morgan Kelly, which is having the effect of reducing (temporarily, I believe) unionist/loyalist support for all-Ireland economic integration.

    Now, as you are one of the most intelligent posters on the site, would you care to offer an opinion regarding MY question (as I’m sure Morgan Kelly won’t). Namely, if Ireland’s economic growth since 2000 is all a property-driven sham, as MK and lots on this site suggest, then why are the GDP growth figures since 2000 as they are in the table I gave in my first post?

    As this will be my last post before Christmas, a Happy Christmas to you, Dreaded Estate.

  22. @Kevin O’Rourke

    Sorry to break my promise that my reply to Dreaded Estate would be my last post before Christmas, but this one definitely will be.

    Rather than get upset about the trivial point about whether or not Morgan Kelly is politically-motivated, why don’t you or someone answer my main point, which is, for the umpteenth time: if Ireland’s economic growth since 2000 is all a property-driven sham, as MK and lots on this site suggest, then why are the GDP growth figures since 2000 as they are in the table I gave in my first post?

    No one seems to want to answer that.

    Happy Christmas!

  23. @ JohnTheOptimist

    Kelly’s entire thesis (namely that growth in the Irish economy since 2000 has resulted from nothing more than a bank lending bubble, property speculation and an artificial construction boom, rather than from manufacturing and exports) falls apart when we look at the figures for growth in GDP since 2000.

    On Monday, IDA Ireland confirmed that the numbers employed in its supported companies fell below the 2000 level.

    In the ten years to 2008, less than 4,000 net new jobs were added by foreign and Irish-owned firms in the tradable goods and services sectors , while overall employment in construction, the public sector, retail and distribution, expanded by over half a million.

    The arrival of US world class companies from the late 1980s resulted in a huge spike in exports; the resultant property boom was boosted by tax cuts and the massive extension of property tax incentives and from 2003 by the Irish banks hugely ramping up borrowing overseas.

    Export performance fell in each of the years, 2003, 2004, 2005, 2006.

    Export data:

    http://www.finance.gov.ie/documents/publications/other/BES2008.pdf

    Export performance:

    http://www.finfacts.ie/irishfinancenews/article_1018704.shtml

    Morgan Kelly’s case is sustained.

  24. @ John the Optimist.

    Its a bit like the banks.
    We havent realised all our losses yet.
    Nama Has put 5 billion aside for finishing stuff so it will be a while yet before we do.
    BTW You will notice Morgan only uses GNP rather than GDP

    Happy Chrismas to all Im off.

  25. @JohnTheOptimist,

    AFAIK, Year 2000 Gen Gov receipts were 37bn. In 2009 Gen Gov receipts might hit 33bn. So over the same period GDP is + 30% yet receipts are -11%. Do this fit your case?

    To me, this suggests measuring anything by Irish GDP is wonky. A lot of GDP and GNP aren’t too enriching to the locals and government. The credit fuelled construction sector is a high calorie element of our GDP. The sector is a lot more like lettuce.

  26. John, you forgot to mention that goverment expenditure in 2000 was around €27 Billion and that it was around €55 billion at end of Nov 2009. I.e. 2009 full year government expenditure will be around €30 billion higher than in 2000. Puff, most of the GDP increase disappears!

  27. @JohnTheOptimist Given that Irish GDP figures have always been severely skewed by MNO transfer pricing, comparing Irish GDP output to that of our EU neighbors is somewhat like comparing apples and oranges.

    Perhaps you should restate your question but base it on GNP performance? I’d also suggest that you include national debt growth and projections for the next couple of years in your question.

    Irish GNP did grow since 2000 but is now in rapid decline. Commercial borrowing underpinned a significant portion of this GNP growth but unfortunately for us, this borrowing wasn’t sustainable and the resulting debt is now being transferred to the state (via bank nationalization and/or NAMA).

    Here’s another (slightly related) interesting read- http://trueeconomics.blogspot.com/2009/12/economics-17122009-end-of-recession-in.html

  28. There is an old saying…”What happens if we run out of fools?”

    I have a feeling Ireland is about to find out the answer to that question towards the end of 2010.

  29. @john the optomist
    Back in 2000 we were not running budget deficits. We are now running a 25 bn deficit which to my mind is in effect a life support or stimulus for the economy. If we stopped the borrowing
    And lived within our means (as we were in 2000), then our GDP would fall to closer to the 2000 level. How close exactly I am not qualified to calculate.

  30. Tis the season to be jolly so I suggest a Christmas Eve game: guess the people behind the anonomous posts. For starters, let’s think about JohnTheOptmist & the clues he has given us on this and other threads.
    1. Northener
    2. Republican
    3. Know his way around the national accounts
    4. Believes there was no housing bubble
    5. Cannot bear anything that smacks of negativity, or anything less than positive, about the Irish economy.

    Mary Lou McDonald’s research assistant?

    How about an ex-stockbroker? Used to work in Dublin? At a firm beginning with N?

    Anybody else want to play?

  31. I have no data to add to simpleton’s post but will make the comment that experience suggests that a site like this should have a no anonymity policy. For example, one of the first and most influential online communities, “The WELL”, famously operates such a policy. From Wikipedia:

    “WELL members use a consistent login name when posting messages, and a non-fixed pseudonym field alongside it. The pseudonym (or pseud in WELL parlance) defaults to the user’s real name, but can be changed at will and so often reflects a quotation from another user, or is an in-joke, or may be left blank. The user’s real name can be easily looked-up using their login name. WELL members are not anonymous.

    There is a time-honored double meaning to the WELL slogan coined by Stewart Brand, “You Own Your Own Words” or (“YOYOW”): members have both the rights to their posted words and responsibility for those words, too. (Members can also delete their posts at any time, but a placeholder indicates the former location and author of an erased or scribbled post, as well as who scribbled it.)”

    The WELL may not be what it was, but the logic endures.

  32. Pah. Economists descend into pissing up the wall contest. My analysis is bigger than yours.

    My limited anecdotal evidence is that even previously prudent people were being urged to borrow up to the maximum they could “credit will never be this easy again”, “it’ll never be as cheap”, “capital appreciation is a cert”, “GDP is growing strongly, so your income is bound to grow”…

    Who gives a monkey’s if GDP was growing? GDP includes washers, buttons, and buffered analgesics. GNP is not much better. I’ll tell you what’s important – employment is important, purchasing power is important, security of employment is important, future prospects are important, public services are important. Those are the things that matter to people. They are all worse than in 2000. You can argue all you want about what model or metric to use, but you neither convince nor fool.

  33. @Johntheoptimist.

    You would vote for FF because of their policy on the North? Which one?

    1960s. FF founds the IRA
    1970s. FF adopts policy of turning blind eye to IRA (including not asking for extradition of people for interview about Dublin / Monaghan bombs.
    1980s. Ditto but with pub nationalist edge of CJH
    1990s. ‘You don’t have to give in to the terrorist organisation we founded: We’ll do it for you’.

  34. @ Simpleton

    “guess the people behind the anonomous posts.”

    You do realise the idiotic irony there right? The whole “you’re posting anonomously and so therefore lying” meme is getting just a tad boring. As is the rather sad innuendo and suggestion you’re more than happy to lead with without actually making a concrete assertion. Grow a set, debate the facts or just shut up.

    There’s clearly been a property boom and bust here, but there’s also been a lot of real economic growth, productivity and progress underlying, or perhaps even causing, much of it. As previously mentioned, 20% GDP loss and 80% house price falls, both of which have been predicted by Prof Kelly, are considered so extreme and borderline hysterical as to allow questioning of many of his other assumptions and predictions that he makes.

  35. Hmm, in this piece he presents an assertion that Irish banks will be forced to return to a deposit only model and by doing this be forced to trim their balance sheets by a very large margin with the accompanying nastiness that comes from a large percentage of the asset side coming from long term assets (i.e. mortgages and the like).

    This doesn’t sit well with me for two reasons:

    a) It takes an extremely pessimistic view of Irish bank’s ability to raise funds in the wholesale markets in the medium term. This seems to come from extrapolating their current difficulties forwards but this seems to be a bit silly since 2009 was an extremely bad year in general for the Irish economy and Irish banking in general and wouldn’t necessarily be a new “norm” for the market.

    b) It seems to assume that there would be no capital inflows if there was abundant investment opportunities in this economy going unfunded which seems to run against basic economics here if one is looking at a medium to long term view. Yes, in the short term market conditions might mean that very little capital will flow into the country but we’re in (or just exiting) a global recession so the level of risk aversion would logically be expected to decrease over the medium to long term.

    Irish banks will most certainly be forced (to varying degrees) to shrink their balance sheets but a prediction of a return to deposit only funding or close to it, seem a little extreme to me.

  36. @Eoin
    While those two predictions of Kelly are extreme and probably very unlikely, particularly property, they may not be too far from the mark.

    What has been the total peak to trough fall in GNP?
    And what do you think the total peak to trough fall in construction will be including commercial property?

  37. http://conceptrends.com/2009/04/01/the-biggest-construction-project-in-the-world-has-begun-inireland/

    A little light relief perhaps?

    Pádraig O’Sullivan
    What about destruction of capital? Does this not have a few effects? I fear Kelly is right on the money, honey.

    Not merely becuase there is less capital around, but because those who control it will move it to places where the reuturn does not depend upon such a small pool of borrowers. What capital that still exists will also move to protect unwise investments that have yet to be sold off and where leverage must still be covered. Many of us expect the $US to remain strong simply because they must repatriate good money from Ireland et al, to pay off bad debts! After the US banking collapse and loss of reserve status, that will be less of a feature but boy will there be problems with the $US then!

  38. Bond. Eoin Bond…

    Why are you so sensitive? I agree there is a valid case for anonymity, and it does not automatically follow that there will be multiple personalities or that any post will be insincere. I think Simpleton, an anonymous poster, has a great idea in establishing identity even if only tongue in cheek. We do tend to give ourselves away, especially if we are not as smart as we think we are and provide too many clues!

    B Peter W

    Cantillon was an incisive analyst, and his story deserves more publicity. Keep up the quotes! Sad to say, the whole credit scam only works when people like some of our anonymous FF supporters decide to tell others that it is different this time!

    It is always the same and the economic ignorance of those who say that Irish banks will soon be awash in capital and lending freely, justifies the existence of this blog even if nothing else does!

  39. @Eoin
    Obviously isn’t the seaon to be jolly. Years ago, Jasper Carrott used to run a great gag which centred around the question: ‘why does the nutter on the bus always end up sitting next to me?’ I kow how he feels.

  40. Five-year interest-only loans and the capital gains tax cut to 20%, fuelled the purchase of investment property. However, the Central Bank bizarrely didn’t require the banks to provide data on interest-only loans.

    @ yoganmahew

    Contrasting the widespread fear, uncertainty and vaporising of wealth, with the optimism of 2000, there is hardly a contest.

    Better roads, hospitals etc. is hardly an offset for most people.

  41. Re JohntheOptimist, come on folks. A bit of seasonal goodwill. I suspect JtO’s views are shared by many people, particularly the governing parties’ supporters who are desperately seeking some glimmer in the gloom. Tackle him with some data and analysis and he’ll back off.

    He went off on one in this thread – http://www.irisheconomy.ie/index.php/2009/12/22/inflation-in-2000/#comments
    about the rising cost of living in the last decade, how it didn’t matter given the economic growth experienced and that, anyway, the cost of living was falling rapidly. I confronted him with some relevant Eurostat data and it seems to have given him some pause for thought and reflection.

  42. To me it was a Ponzi scheme … you put n people into n houses, & pay them to build n more houses (you get your money back in rents for the first n houses), get n more people to live in the new houses, the 2n people build 2n houses, get 2n people to live in them so now you have to build 4n houses … meanwhile you are creaming in rents and mortgages, there is competition for the n new places on your scheme every round, so the price of houses rises…

    At Keynes said, it is all a question of who is left standing when the music stops in Musical Chairs, or who is left with the Old Maid in the card game Beggar My Neighbour. Its all about Getting Out in Time.

    Usually, the Ponzi schemer absconds with his loot, or goes to gaol (like Bernie Madoff). Here, it is a case that there was no single schemer, but everyone fooled themselves. So the game is to make someone feel resonsible & make them pay the price, or use your influence as a “big player” to save yourself … in this case the taxpayer & the low paid are bearing the burden.

  43. The economist outlook on things has certainly given me some pause to think over the last couple of days. Sometimes, something rattles around in the rear compartments of the brain and begins to evolve, almost unexpectedly.

    Cearbhall O’Dalaigh hinted about a two tier system, a black economy in this post here:

    http://www.irisheconomy.ie/index.php/2009/12/21/what-kind-of-banking-inquiry-and-why/#comment-29093

    In fact, Colm McCarthy indicated in the original blog entry that Ireland may be creating the conditions, whereby fiscal adjustment is difficult to deliver. People aren’t satisfied there is a story they can believe, so they can get on with the process of re-build-ing in the aftermath.

    The thing is, Ireland always depended on a two tier system, it always existed. Or to put it more accurately, people wanted to believe that a two tier system existed and you had to get on the right side or be left stranded. Why else would people invest so much in a piece of property?

    If you purchased a piece of property, sure you might have a 40-year mortgage that drained all of your life away. But at least, that reality was better than an alternative, whereby you were stuck on the wrong side of the two tier system.

    But it didn’t only apply to purchase of property. It also applied to your choice of employment. It was important, almost crucial to some, that your employer was on the right side of the two tier system also.

    There has been reporting done in the Irish newspapers recently about senior banking officials who were also sizeable property owners. They basically owned empires worth of property. All over Ireland. Not just in a specific area. There were great networks of partnerships and amalgamations of ownership and shares. It was difficult at times to understand where the banking system ended and the property system began.

    Indeed, in the recent ‘Prime Time Investigates’ program on Irish television, economist Morgan Kelly notes: We know exactly what each and every Irish politician owns. That is declared before they take up office in Dail Eireann. But what we don’t know about, is their exposure to property loans.

    I was interviewed on national radio myself, during the Liam Carroll high court case in summer ’09. We exchanged some general conversation prior to the interview. To iron out which things I was allowed to say and what I couldn’t say. But in the process of talking about the situation, I could glean the fact, that prominent journalists and broadcasters in Dublin city, were genuinely concerned.

    Because they had earned a lot of money during the good times and were genuinely having second thoughts about their decisions to have invested in Dublin property.

    In other words, this was not just another story. This was also personal, they were invested in the entire scheme. I had to thread lightly, and not be as flippant as I normally would be. People, and broadcasters included were all very concerned for the future.

    I think the clearest example of a two tier system I encountered was a fellow who worked as a structural engineer. His knew his stuff about reinforced concrete. He gave up that job. Instead he worked for a middle-of-the-league property developer. (Refer to my point earlier about the need to work for an employer who is on the right side of the Irish two-tier system)

    Now, he was a guy I know was capable. He could have applied his engineering qualification and skills to all manner of things. He was naturally very bright. Like so many people the country of Ireland is so blessed with.

    But instead of doing something useful with his life, he studied the 2000 Planning and development acts from cover to cover. That is one of the dullest and most pointless things you could do with your intelligence and your time. But he done it anyhow.

    Within time, he became an indispensable component of the middle-of-the-league property developer’s arsenal. Any questions or confusion about planning, social affordable housing commitments etc, my friend the structural engineer looked up in his book of the Planning Acts.

    I often did wonder why this guy, brighter than myself, younger than myself and blessed with a young wife and excellent physical/mental well being, would be bothered his a*** wasting time with an old codger like my boss – a middle-of-the-league property developer.

    It has only been in the last couple of days, reflecting in a casual manner upon Colm McCarthy and Cearbhall O’Dalaigh’s comments about the two tier system than it struck me out of the blue. In Ireland, it has always been more important to work for an employer who is considered to be on the right side of the two tier system.

    More important in fact, than working for an employer you want to work for, or working for yourself. In our small back room at our workplace, pinned to the wall (instead of a sacred heart) was an A4 colour print out, a photo of our boss hand-shaking with then, Taoiseach Bertie Ahern in the Galway Tent.

    I didn’t understand any significance of this photograph back in the years 2005/06 when the picture appeared on the wall. Call me innocent, but I just thought it was a nice novelty to have. A picture of our boss with the Taoiseach. I have grown up a little since then.

    The point is, this is a real life human example. The young structural engineer in question is years behind the progress he should have made as a professional in his career and in his life. The latest news I heard (I left that employment a couple of years ago) was the young structural engineer had been fired – the boss had no use for him. The tent had been dis-assembled permanently.

    I wish to contradict both Colm McCarthy and Cearbhall O’Dalaigh. I don’t think we are in the process of building a two-tier anything. I don’t think we have to. The trouble with using the economist’s point of view, is we may come to the conclusion that a two-tier system is a result of the property crash and the banking crisis.

    I believe that to be a vast over-simplification, and it avoids the all-too-real fact that the tragedy of the Celtic Tiger, has been the two-tier system which existed all along. It was a two-tier system that ordinary folk, who were otherwise gifted with talent and ability, desperately wanted to cling to.

    Because, for them, in their own warped way of looking at the world, the two tier system, being on the right side of it, represented the only way to salvation in this small country of ours.

    The final thing I have to say, is that Liam Carroll, Bernard McNamara, Derek Quinlan (even Sean Dunne for that matter) and all of the other ‘builders’ as featured in Frank McDonald’s book of that name – were excellently capable people and construction genius(es). They didn’t need the banks, they didn’t need the politicians.

    Indeed, it was a sad day they ever bothered to waste their time with a set-up here in this country. They should have applied their talents elsewhere and I would not blame them if they did that exclusively going forward. Who the heck needs Ireland, or would want anything to do with it?

  44. @Pat Donnelly

    Yes, that will have effects but one would expect for new capital to be created over the medium to long term and this acts as a counterbalance to the loss of capital from the fallout of the crash. Right now there is a lot less capital around in the wholesale markets but this is exactly what one would expect given the events of the past few years, it shouldn’t be taken to be a new market norm for the medium to long term.

  45. @Brian O’Hanlon: It’s not so much two tiers as a battle between two cultures, maybe call them traditional v modern or pre v post independence mindset.

    I felt that in the second half of the nineties when the FDI strategy really started to take off that the modernist culture was starting to come to the fore. With the construction bubble everything swung back the other way. The internationalist dimension of FDI forced us to behave ourselves and clean up our act, the localised nature of the construction boom made a virtue out of knowing the right people.

  46. If we didn’t have john the optmist posting here, no one would be disputing theses such as prof kelly’s’. And out of such agon, we all learn.

    @John the optimist: ‘It wasn’t the construction boom driving the economic boom. It was the economic boom driving the construction boom’:

    I doubt it was a causal relationship at all, rather a reciprocal functionalist relation: econ boom driving construction boom and vice-versa, with neither relation being more determining than the other.

  47. Morgan Kelly has sacrificed a fair bit of earning capacity by being so upfront in his advice: he cannot now be regarded by the kleptocracy as a tenable pureyor of opinions useful to them.

    I venture to suggest this is why many of those who were just as aware of the disaster as he was but did not warn the likely victims. They were busy making money supporting the klptocrats making hay. Since there is a chance that this form of income will become available, they decline to point out the obvious. They are complicit by their silence and the great voting victim cannot awake and save itself! By having a quasi monopoly of authorized wisdom, these faint hearts, filled with greed, are helping to teach us all a few lessons!

  48. @ Pat Donnelly,

    very well said Pat.

    The conclusion I have come down – bear in mind, it is biased by the fact I think from the viewpoint of the construction industry – but basically, the bankers and politicians were both riding on coat tails.

    Think about Irish history for a second. Think about every time someone who ‘did well’ abroad in the construction industry and then decided to come home and start a project on the ‘old sod’ – what has ended up happening?

    You’ve guessed it. A combination of politicians and bankers have managed to sabotage the whole entreprise. But the next question to ask is why? Why? One could surmise it was to do with plain begrudgery. That is quite a powerful motive.

    But probably it comes down to one thing. Politicians and bankers combined find themselves in a position to see the ‘plays’ happen and intervene. I mean to intervene, to add some slant or some indirect ‘play’ which nets from a large figure of money.

    Without having to do anything more importantly. Without having to do anything. Shane Ross is correct. There is a circle which does need to be broken. Only someone Shane Ross could describe the ‘circle’ as well as he does. But if we simply take the triange of politician, banker and builder for a second.

    I believe in that equation, the builder is the only party with some kind of output. The other two players are only jostling their way into some kind of position for the ‘big take’. As a trout fly fisherman I understand this, because the best locations in the stream are always occupied by the largest fish. The best ‘food stream’ for the least about of effort. That is the privelege of being big and awesome.

    I only worked for Liam Carroll for two brief years, but in that time I had begun to attract attention from both politicians and financial people, like never before. A lot of it was semi-genuine. But people ask me why was Carroll a shy-coon. I would have to say, judging by the attention working in the property business attracted to myself, from anyone politically connected etc, I began to get some sort of picture of the ‘circle’ that Ross described in his writing.

    Yeah, it needs to stop. Not because it is bad or seedy. But because you are there trying to get your work done and do your job properly. And you keep getting bother-ed an pester-ed by this guys, who are little more than jumped up trouble-makers.

    I recommended someone for a little bit of consultancy work once. He told me he was hard up. It was the height of the property boom. I thought nothing of giving the guy a dig out. I recommended him at work and left it at that. I mean, I didn’t follow it up or anything. But then I received a tap on the shoulder and learned that my friend had landed a bill on our company for the most of 100k.

    Needless to say, the relationship was cut short before any work commenced. But I often wondered about it afterwards. I wondered why did a guy like that submit a bill which was over 5 or 6 times what the consultancy work should have cost? I wondered what kind of dodgy under world I had stumbled into.

    I left the employment shortly afterwards. Something didn’t feel right. Because the guys bill had been as large as that, some people at work wondered if I had been looking for my slice of the 100k. As I said, I had only done the ‘social introduction’ and left it run its course. It run its course alright and I resented the guy I introduced for doing that. Because he must have known I would come out of the arrangement looking fairly soiled also.

    I later learned he was very anti-developer community oriented. He thought of himself as a shining light of ‘resistance’ against evil developers. But he often kicked up a tantrum to try and rub the developer’s face in it. Look it, I know what it’s like. These are the kinds of ludicrous sums of money floating about. That is what I mean about politicians (even the shining lights of hope, good ones) sticking their nose in where it is not needed.

    All we knew was we follow a simple contract with all stakeholders to deliver something that the market requires at a certain place at a certain time. No more. Anyone else can build that into something more or less as they wish. But I have come to learn that some people in the political sphere have rather active imaginations.

  49. @ Mark,

    “It’s not so much two tiers as a battle between two cultures, maybe call them traditional v modern or pre v post independence mindset.”

    Have a look at Warren Bennis’s classic book on management, Leaders, strategies for taking charge. I was reading the section, Meaning through communication in which Bennis develops something he calls Social Architecture. He developed the phrase to consciously use an alternative to ‘culture’. Because culture can be defined in so many ways.

    For the purposes of business and strategic management he finds the social architecture concept more useful. From the book, Bennis says,

    “Perhaps most important, though, is that ‘social architecture’ implies change and tractability and that leaders can do something about it, whereas ‘culture’, as ordinarily used, implies an unbridled rigidity or intractability”.

    (From page 103 of Bennis’s book)

  50. To refer back to politicians and bankers quite briefly. To put it in another way, I don’t think that Charlie McCreevy’s interventions by means of tax schemes based around property and so forth, do represent any less of an improper interference by the Irish ‘system’ into the normal runnings of development and building, than any previous efforts of our forefathers with their paper envelopes and nod, wink etc.

    That is to say, McCreevy’s interference seemed on the surface to look a lot clean-er and more modern. Like the phrase from the movie Ocean’s Thirteen when the gang wanted to turn off the power supply to the casino, they were accused of being ‘analogue players in a digital age’.

    Sure the Bertie/McCreevy administration was a little more sophisticated in how it approaches things. But it still represented an undue interference by a public office into something of the private sector. At the start of the building boom in Ireland there was a small urban renewal project spear-headed by Charles Haughey and later on Laura McGahy got on board as a young project coordinator. It was called Temple Bar

    Temple Bar Properties, the quango set up to administer development of a couple of small ‘land banks’ previously belonging to the state bus company to build a bus terminal ran into opposition with it’s neighbour in Wood Quay, Dublin City Council. What Temple Bar was doing was independent of DCC to a certain degree and they resented that.

    It is the same with the Dublin Docklands Authority. It has no real friends in Wood Quay and possibly visa versa. DCC interfered a lot in the end with the plans of Temple Bar properties. That whole debacle and much of the ‘Bertie projects’ which followed afterwards is a very interesting history.

    That book has not been written yet.

    It is a pretty wide scope and revolves mainly around the fact that the Irish political appartus always gets too heavily involved in projects where it shouldn’t. Take the new rugby stadium at Thomond Park as an example. It happened without too much problems. People simply got on with the job. It was built at the height of the construction boom, but built within a very tight budget.

    Maybe, if an investigation into a banking crisis were to happen, perhaps this is where it would take us. It is a pretty wide scope. But there are a lot of folk around, involved at various levels, I have spoken to. They all tell a very interesting story of how things operate in Ireland.

  51. Gentlemen I stumbled across this blog while trying to find the meaning of #Nama – which still eludes me at this point However I wish to comment on your conversations. But the screen of the iPhone is no Moleskin. I need to access this elsewhere. Suffice for now to say that I am Australian; have a son who migrated to Ireland and left and his brother successfully develops property with a modicum of debt and an astute awareness of the value the builder’s output makes to the economy. I trust you will allow me to return.

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