Casey’s Questions for the Banking Inquiry

Today’s Irish Times carries an excellent article by Mike Casey, formerly head of economics at the Central Bank, listing questions he believes should be addressed by the banking inquiry.

47 replies on “Casey’s Questions for the Banking Inquiry”

@Karl Whelan
It is extremely significant that a former head of economics at the Central Bank should end his article by stating bluntly:

“It is also worth remembering that our system of political appointees allows senior politicians pull the strings without the public knowing.”

I posted this in the previous “inquiry” thread, before you put this up! But here it is anyway…

Note how he doesn’t make simplistic demands calling for justice or heads on plates, or claiming that somehow some proceedings being kept out of the public eye will make the inquiry irrelevant or a cover-up etc. Its a serious, rational and pragmatic response to some of the childish sh1te that had been spouted here, there and everywhere over the last few days. At the end of the day, whats truly important in this inquiry is what questions get asked and what answers get given. As he says:

“But the methodology probably is not all that important as long as the major questions are answered fully and honestly within a reasonable timeframe. ”

This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.

An additional questions might be for the banks to identify the categories of bondholders for each type of bond along the following lines:
External?
External to EU?
Domestic?
Pension Fund?
Number of members of pension fund >x? <y?
Investment Fund?
Sovereign Wealth Fund?
Coporate Investors?
Financial Institutions?
Retailer (e.g. Dunnes Stores, Tesco)?
Insurance Institution (e.g. Quinn Group, AIG)
Date issued?
Date last transferred?

We should analyse whether these bondholders are also holders of sovereign debt.

Details of all representations made by bondholders and bondholder representatives to financial institutions or the state should be disclosed and investigated.

On a totally unrelated matter…
The banks were supposed to improve speed of electronic funds transfers between banks as a condition of the bank guarantee? Has anything been done since Sept 08? It still takes 3 days for money to go from my BoI current a/c to my BoI credit card a/c!

@Eoin

“But the methodology probably is not all that important as long as the major questions are answered fully and honestly within a reasonable timeframe. ”

This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.

For me the most important thing is what happens after the enquiry has concluded……changes have to be made to the whole banking system and this is the main reason in my mind for the enquiry…….part of this of course is getting rid of the people that caused the problem.

Obviously I would prefer if it was in public because as we all know the last sentence in this article is very apt:

“It is also worth remembering that our system of political appointees allows senior politicians pull the strings without the public knowing.”

@ zhou_enlai

No…Absolutely nothing has been done about the speed of electronic fund transfer with BOI, although were I am its instant.

@Eoin
“or claiming that somehow some proceedings being kept out of the public eye will make the inquiry irrelevant or a cover-up etc.”

All proceedings for the foreseeable future will be out of the public eye and certainly all proceedings until well after we have lost additional billions – on top of the €11 Bn, €7 Bn of it public pensions – already lost on the banks.
Of course €550 million of the public pensions effectively went to help the “small business” of megadeveloper Liam Carroll.

You are starting to remind me of John Gormley (first three pages worth reading):
http://www.politics.ie/political-humour/122582-private-not-secret-john-gormley-dumber-than-george-w-4.html

But here is some good news:
“Fine Gael lodges formal objection to Nama with EU.”
http://www.irishtimes.com/newspaper/finance/2010/0121/1224262775999.html

@ De Roiste

“Obviously I would prefer if it was in public”

I don’t think anyone is saying different. I just think that if we held it all in public we’re gonna end up with a lot more responses along the lines of: “My solicitor has advised me…”, “I have no comment on that…”, and “I cannot recall the events of that day…”

@Eoin and De Roiste
“This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.”
There are, however, two categories of people. Both have valid concerns – one with efficiency (get the system fixed), one with justice (we’re paying for it at the moment, the culpable should also be paying). In the past in Ireland, we’ve only ever seen the former addressed, never the latter, hence the ludicrous position of a former Taoiseach winning handsome sums on the horses…

We have allowed a situation to develop where power doesn’t carry responsibility. The financial crisis is precisely the sort of mess that causes. Nobody cares to do the right thing because there is no consequence for not doing it. Nobody is ever disciplined for ploughing on with the same course.

There used to be a saying in the IT industry “nobody every got fired for buying IBM”… until, that is, companies began to look at their IT spend and then they did… we need to move away from the “no one could have forseen” culture to at least get to the “our best efforts weren’t good enough”…

@ Karl Whelan,

“Did the Financial Regulator decide not to take any action and if so, why?

This is the most fundamental question and it is important to explore it further. In its mission statement the regulator is strangely silent on the question of intervening in a troubled financial institution. It could be argued that the failure to intervene is due to bureaucratic inertia. The regulators wait and wait and hope the problem will disappear. The point then comes when the troubled institution hits the wall and it is too late. We then go suddenly from the possibility of preventative action to the need for damage limitation – which as we have seen in Ireland is extraordinarily complex and costly.”

As recently as the last couple of evenings, I have been coming to much the same conclusions as Donal Casey has, myself. It is funny though. Far from being an economist or central banker myself – the Lord knows – it is funny how I managed to come to similar conclusions myself, in my own ham-fisted and ridiculously amateur-ish fashion.

I was only looking at things using the basic tool of ‘using analogy’ to find my way. If one looks at the sequence of events, and compares it to a hospital or patient/medical treatment situation – the regulating authority as described in Donal Casey’s IT article would fit the role of attending practitioner to the patient’s case – the leading diagnostitian if you will, whose responsibility it is to prescribe some treatment.

But as often happens in the case of the medical diagnostitian, is they are over-ruled by the board of the hospital (which may consist of high net worth individuals, who contribute money and have no medical background at all) or be over-ruled by other piers in the medical profession, who stipuate a certain policy and course of treatment. That is, a low-risk treatment, but perhaps a treatment of much less effective-ness.

That is, it is probable to suppose that many patients out there are lying waiting to die, because some course of treatment is too risky and un-proven. There are too sides to that argument, and it is a wicked kind of debate.

BOH.

@yoganmahew
I agree.

@Eoin
As Karl Whelan has already explained public hearings for the Commission of Inquiry are unlikely and the Commission will finish…..Pat Kenny was speculating the Oireachtas would end up looking at this in Autumn 2011 in the run up to a general election. You can’t get more politicised than that. If we don’t want it excessively politicised we should have it in public now in the middle of the government’s term.

“A couple of initial observations. First, as I understand it, it seems unlikely that the second stage will involve any public hearings. The Commissions of Investigations Act of 2004 (link here) states that:

A commission shall conduct its investigation in private unless (a) a witness requests that all or part of his or her evidence be heard in public and the commission grants the request, or (b) the commission is satisfied that it is desirable in the interests of both the investigation and fair procedures to hear all or part of the evidence of a witness in public.

Neither (a) or (b) seem too likely to occur.”
http://www.irisheconomy.ie/index.php/2010/01/19/government-banking-inquiry-proposals/

If our government is innocent of a significant role in the lending bubble and bank collapse why aren’t they anxious to be exonerated? If even THEY don’t think they aren’t innocent or aren’t sure they SHOULDN’T BE THE GOVERNMENT.

@ Eoin,

“This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.”

I have to admit, I agree 100% on that.

I further elaborated a little in this reply here:

http://www.irisheconomy.ie/index.php/2010/01/19/government-banking-inquiry-proposals/#comment-32782

To specifically blame Ahern, Cowen, Lenehan or anyone else, is perhaps to confer a way too much credit upon politics in general.

Now, how about that for a radical assertion!

Seeing that Michael Casey’s tagline is as a past senior official of the Central Bank, which is more relevant than being one of some 190 or so directors of the International Monetary Fund (the board that matters is somewhat smaller), isn’t it a relevant question to ask, why he didn’t go public on these issues when he could have had an impact?

I have raised this before because we can see in organisations, that it is very rare/ in Ireland non-existent, for people who see what is going wrong to risk position and money by taking a public stand. The Catholic Church and senior Irish public service illustrates the point.

I don’t know Michael Casey but given the calamity that has unfolded, I think that it’s important to make the point, that it is easy to take a stand with a very comfortable pension. But it’s tooo late.

Too many remained silent, accepted sham benchmarking and saw reckless mismanagement or the lack of basic management, close at hand.

To really investigate this dénouement, it should extend further than the search for villains in the banking sector.

How many of us would have behaved the same, including authors in search of fame or money, in an area where there was a backdrop of a broken governance system, of limited accountability at best?

This is what happens with the fish, as it rots from the head down.

@ zhou_enlai

The Central Bank considered itself impotent to force banks to increase provisioning as the Spanish Central Bank did, even before the excuse of having to defer to a regulator who was part of the bank..

Seven members of the CB board were on the board of its regulatory unit and the governor told an Oireachtas committee last year that he had no power to intervene in ths bank lending madness.

Being charged under the OSA, for claiming incompetence/reckless mismanagement would have made an interesting case.

It was certainly a dsyfunctional setup up given that in a small organisation, the head of the FR unit didn’t hear of the discovery of the Fitzpatrick loans for 9 months.

The level of communication, relations with staff, must have been an absolute joke.

@ E65bn

Pat Kenny, the posters on politics.ie, one of those guys who hangs out at the Connolly Luas stop….your list of sources and references is indeed overwhelming.

But Michael Casey, ex Central Banker, ex IMF board member, who doesn’t appear to take all that much issue with some of the inquiry taking place behind closed doors? Well sure what the f*** would he know…

What is most disturbing about all this is, is that nothing has changed. Look at the Kraft take over of Cadbury as an example of how it is business as usual. We can have all the inquires in the world but unless these people are going to end up suffering a healty loss it’s all a waste of time. Why did it happen, because of greed. When shareholder value is the over riding motive for doing business you are always going to have a nasty mess for some poor fool to clean up, pay for. Buy, buy, sell, sell!

@Michael Hennigan

There were certainly serious breakdowns in the Central Bank and Financial Regulator. Individual officers may have faced legal impediments to going public on these issues. It shouldn’t need somebody to go public to cure these problems anyway. It remains to be seen how much of a basket case these bodies were, particularly the financial regulator.

@ Eoin
“This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.”

I am not in favour of witchhunting but I have a problem with this type of logic.

Sytems can’t be held accountable but people who are charged with implementing them and then do not, can and should.

I would agree with French financial investigator, Eva Joly who heads up the Icelandic Banking inquiry who said, when talking about the global financial crisis that ‘ultimate responsibility rests with the greed culture spread by Wall Street and the City of London’

Lots of banks especially in countries that were pro free market economics followed the lead (and therefore fared worst) but following this lead required that certain rules were broken and standards were allowed to lapse.
It is the people who did this that we need to get answers from.

Mainly so we can try to introduce legistlation to reduce the chances of it happening again

The persons testimony that I want to hear in Public is that of Patrick Neary.

The courts should those who committed financial crimes. I dont mind waiting once it happens.

@ Eoin
“This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.”

It is not a question of looking for people to blame but a question of justice being done. It is self-evident that if justice is not done and punishment not meted out wrong-doers will feel a sense of impunity and will be more likely to re-offend. Looking at the history of Irish corporate governance and politics, it is quite clear that justice is rarely done and the offenders re-offend again and again.

It is really quite simple. Punish those who commit crimes. Sack those who are incompetent. The system will sort itself out.

Any bank inquiry weather public or private will fail as you simply cannot investigate yourself .
For any hope of a true investigation you would need foreigners with no connection to Ireland to hold an inquiry .

Well said Eamon accountability is vital and should be the end game of any inquest. We already know a lot of what happened we need to know why it happened and who is responsible . Those responsible need to be removed and if they broke the law should be charged. That is not a witchunt its Justice and anyone with nothing to hide should welcome this approach

Sorry to be so lowbrow . But why do we need an inquiry ? Everybody knows what happened . I am not an expert but was Anglo not rigging its own share price and misleading the market ? Maybe thats illegal in some parts ?

Did the banks not get carried away with property speculation and lend out every cent of their money and when that ran out just borrowed more and lent that out as well ?

Did they not employ economists to tell us how property investment was such a great idea etc etc etc ?

I was taken on a tour of ghost estates by a developer friend on a recent visit to Ireland . Any chance of ‘ long term economic value ‘ is a joke .
As he pointed out , anything that is actually sold in these estates is owned by investors who have seen their investment drop by at least 60% in value . And their tenants are Eastern European’s who are leaving in their droves thereby making the problem worse .

I met with some friends in business who have no idea how they are going to get cash flow in 2010 . One friend employes over 100 people and has a contract with one of the biggest and well known companies in the world . They will not be paying him until June . He was very worried about his cashflow until then . The fact that his client is suh a well known and respected force in industry will make no difference to the bank . He told me that the banks will simply not lend and will not even ask who is client is .

If anything we need an inquiry into how to get back to a normal banking situation again .

@Alan:
Ah sure they had legal advice which said it was within the law to do all that. So any breaches of the law were unintentional and they were all people of great character and utmost probity.

@ Garo

Maybe they should have the Moving Hearts song ‘ Irish Ways And Irish Laws ‘ playing in the background as Cowen responds to any banking inquiry with that phrase that is used each and everytime something shocking is revealed by an inquiry in Ireland ” It must never happen again “

10 What does the Competition Authority make of two big institutions colluding to window-dress year-end accounts? Are there other examples of collusion?

This isn’t a matter for the Competition Authority, its a matter for the securities regulator. But, Ireland does not have a securities regulatory — like the SEC in the U.S. Instead the financial regulator does both bank regulation and securities regulation. That’s a huge mistake. If you have “regulatory capure” of the bank regulator, your securities regulation goes down with it.

The Anglo accounting fraud amply demonstrates the lack of a proper securities regulator in Ireland. Note, AIB or Bank of Ireland did not engage in an accounting fraud. Its interesting to ponder why. it can’t be an unrelated fact that AIB and BOI are “cross-listed” in the US whereas was not.

Since both AIB and BOI have their shares listed on exchanges in the U.S. they come under SEC regulation. If they had engaged in the same accounting fraud as Anglo the consequences for management would have been far different. Instead of dealing with the non-existant securities regulator in Ireland they would be dealing with the Enforcement division of the SEC. The Sarbanes-Oxley Act prescribles 10-20 year sentences for accounting fraud in the U.S. — and its enforced.

@ Garo/Eamon

Excuse me while i say, eugh, we’re going down the same route again here.

The inquiry can not dish out “justice”, nor can it actually decide on “wrongdoing” from a judicial point of view. It is solely about asking questions, getting answers and finding out what happened. That is its sole purpose. That is Michael Casey’s point, that the questions need to be good or we won’t get any good answers. And people need to be willing to answer them or we won’t figure out what happened. Whatever leads on from that is a seperate issue (and an important one).

The inquiry is completely seperate to and independent of the criminal and civil justice systems. It cannot compel people to cooperate beyond the bare minimum. It cannot find anyone ‘guilty’. Indeed, it needs to assume no guilt on anyone from the start. It can only ask questions and hope it gets answers. By providing private testimony, annonymity or in some cases immunity from future prosecution, hopefully the answers will be good, thorough and far reaching. Hopefully they will lead us on to further measures, ie judicial and regulatory actions. But thats the point, these actions will only come after the inquiry, using the facts gained during it.

However, if we go in looking for who did what ‘wrong’, who is at ‘fault’, and who is to ‘blame’, then i don’t see this inquiry being any more than a waste of time and money, both of which we’re sadly lacking at the moment. If we make the express purpose of the inquiry to, quote, dish out “justice” and make sure “punishment is meted out” to those who “commit crimes”, then i don’t see too many people co-operating with this inquiry, and so we’ll get zero in the form of answers. Just like the real witchhunts of hundreds of years ago, the truth will be the last thing to come out of it.

@Eamonn, Garo, Andrew, Brian
I agree. We need to stop pretending that Paul Appleby is the Irish Eliot Ness. After yesterday the penny should have dropped with everyone.

Let’s face it, public shaming is the only sanction the vast majority of those who wrecked the country’s economy and it’s banking system will ever get. Only a microscopic proportion of our politicians, public figures, senior civil servants, senior bankers and mega developers will ever be tried. One or two perhaps jailed, none for very long. Inviting them to appear before an Oireachtas committee in a few years – which they will probably refuse to do – is no substitute. Even if they do appear it will be several years after the events they are discussing. Public shaming delayed is public shaming denied. Appearing in a report published in 2011 about events as far back as 2004 – simultaneously with a host of others – is in now way comparable to a personal grilling on TV.

If getting the truth was enough to make Irish institutions reform why did AIB crash again? Since it’s bailout in the mid-eighties it’s been scandal after scandal, each one bigger than the last. Why will AIB reform if it is let off easy again? It didn’t after:

1979 Gave extraordinary benefit to country’s leader
1980s Reckless lending – agricultural land
1985 Reckless trading and reckless oversight – ICI
2000 Tax evasion – DIRT
2002 Reckless oversight – Rusnak
2004 Theft – Bank overcharging
2008 Reckless lending – Green Property
2008 Massive reckless lending leading to total collapse – Bank guarantee
2009 March: Reckless lending – Half a billion of effectively public pensions given to AIB for small businesses but instead loaned to a mega developer against flimsy security

A 21 year old BComm who joined AIB in 1979 would now be 52. He still has 13 years ahead of him. If he is rational he and his colleagues will commit crime and criminal negligence every day until he leaves in 2023 to maximise his salary and bonuses. And after his criminality is exposed again, any attempt to question him publicly let alone convict him will be described by the establishment as witch hunting and vengeance.

@Eoin: I agree that it is not the purpose of an inquiry to get justice. But TBH there doesn’t seem any likelihood of justice against white collar crime in Ireland. The DCC case was a very strong indictment of Irish corporate governance and regulation. And I can’t for the life of me understand why Sean FitzPatrick has not even been questioned yet let alone put in jail. Do ask some of your non-Irish bank contacts what they think of DCC and of Ftizpatrick. If these things got wide publicity outside the US it would severely dent Ireland’s reputation as a place to do business. I mean why would a FII invest in an irish company knowing that there could be accounting fraud or insider dealing under the cover?

The questions will have to be far more circumscribed if there are going to be useful answers.

The questions seem to suppose that banks are solitary thinking beings. No… banks, even small ones, are complex. So much so that some the questions could be answered with a Yay or Nay, presented one way or another, and plenty of examples to boot.

Where that all leads you, I don’t know. I’m all in favour of enquiries. But like banks, enquiries have to be properly managed.

Moreover, the questions are very Irish… as if all the woes originated in Ireland. Yet recognition of the context abroad is critical to understanding.

Quite ironic to read today’s article in this light of another.
http://www.irishtimes.com/newspaper/finance/2007/0302/1172185350811.html
also by the central bank’s former chief economist…
“Making the banks concentrate more on the risks inherent in their lending is all the more important since the Central Bank cannot adjust interest rates and has not engaged in moral persuasion in an attempt to moderate lending.”

And as Michael Hennigan asks, what was economics research up to at the central bank over this time, and what input was given for the CBI’s Financial Stability Review of 2007 (after Michael Casey’s time I believe)? It might be more instructive to explore the factors that led to the writing of such research.

Nor is corruption a new theme – see Michael Casey h here.
http://www.irishtimes.com/newspaper/opinion/2007/0219/1171575969286.html
or here
http://www.publicinquiry.eu/2007/02/19/corruption-an-insiders-account/

In his writings for the Irish Times, Mr Casey has regularly been loud and fulminant in his criticism of politicians. Fair enough – that is his right.

The main focus of his questions above are directed to the actions of the Financial Regulator. But he is strangely quiet when it comes to hard questioning of his former employer, the Irish Central Bank.

This is disappointing given that it is the Central Bank which has formal responsibility for regulating the financial system and ensuring its stability. (The Financial Regulator has responsibility for regulating individual actors in that system). So, for instance, it was the Central Bank which used regularly publish the Financial Stability Reports. Here are some conclusions from the last such report, published in 2007:

“Notwithstanding the international financial market turbulence, the Irish banking system continues to be well placed to withstand adverse economic and sectoral developments in the short to medium term.” (Page 11)

“The underlying fundamentals of the residential market continue to appear strong and the current trend in monthly price developments does not imply a sharp correction. The central scenario is, therefore, for a soft landing.” (Page 16)

Michael Casey’s failure to list a single question asking why the published economic analysis of the Central Bank – the body charged with maintaining the stability of the financial system – was so profoundly defective is disappointing. His failure to even mention the name “John Hurley” (the governor of the Central Bank) is also disappointing.

A key question which I would like to see publicly addressed is this: did the then cabinet (2002-2007) ever receive a formal warning of what was going to happen from any state or para-state agency?

Notwithstanding the merits or otherwise of the question posed by Mr. Casey I concur with the points made by Cormac and Michael Hennigan – as I understand it, Mr Casey was in position up until 2005 at which point the slide to oblivion was well underway supported by the numerous tax breaks and incentives in place. The shift from export driven growth to massaged maintenance of the facade of economic development was already apparent as was the state’s increasing over-reliance on property based taxes. Surely these were issues that any self-respecting economist or group thereof (what’s the collective name – a ‘shower’, a ‘contradiction’, a ‘curve’ or maybe a ‘regression’?) should have spotted. So perhaps one of the starting points for Govenor Honohan should be to formally question Mr. Casey, not about his retrospective views but about his then responsibilities (2005) asking him to identify the papers he produced that analysed and alerted the CB and the Regulator to the impending disaster. If he can come up with these and demonstrate that that wisdom existed and was ignored then I’ll be sure to tune into his columns on a more regular basis. Failing that he’s just another hurler on the ditch although a far more cynical one than most of the rest.

Also and accepting that responsibility for the regulation of the banking system rests with the CB and Regulator, it seems to me that the equally and possibly more critical issue of the management of the economy at an administrative level is continually under-played. I accept the crass culpability of the politicians (noting that the soldiers of fortune have today been given a boost with MRBI poll!!!) but it seems to me that the permanent government was extraordinarily derelict in its duties and has gotten off very lightly indeed. Maybe people just don’t understand what they do and the range and reach of their influence but I simply cannot fathom how they got things so wrong – and, of course, there has been no change at the top in that regard. The new Sec Gen was intimately involved not only as a senior manager in the economic mis-management of the country’s finances but was also, as I understand it, the point man in the Department’s interaction with the CB and the Regulator. The dark lords also sat on the Board of the CB. So what did they do? Why did they fail so miserably and to such cost? Were they simply incompetent, indolent, economically illiterate or has there been a genetic transfer between them and their long-term political masters that makes them effectively inseperable? Whatever the answer I’d like to know.

The capacity of the Department to show its teeth when it chooses to is very evident now but was all too absent for far too long in the past….another inquiry anyone?

@ Cormac/Tom

The establishment of a separate regulatory unit is sometimes used as an excuse for appalling failures at the bank. However, the CB was already in an enfeebled state when Hurley arrived in 2002.

One can only wonder at the naïveté of Governor Maurice O’Connell penning his fifth letter to the lenders, in the period 1998-2001, pleading for restraint.

They laughed up their sleeves on receiving the first one and blind faith prompted four more.

The board was also useless beyond words.

As for the Oireachtas holding others to account, the record is also dismal.
Identifying 10 from 216 who could competently address issues of the crisis, would be difficult.

It’s a sorry State and state.

In Iceland, the prime minister of the bubble became the governor of the central bank and is now editor of the main newspaper, despite the crash.

At least Bertie Ahern was put out to grass and let’s hope he stays there.

Two observations.

First, in relation to Cormac’s point “The main focus of his questions above are directed to the actions of the Financial Regulator. But he is strangely quiet when it comes to hard questioning of his former employer, the Irish Central Bank.” I know that during my time there (2002-2007) I didn’t think of it as “I work for the Central Bank and the Regulator is some other organisation”. My employer was the Central Bank and Financial Services Authority of Ireland. There may have been separate units looking after monetary policy and regulation but nobody was in any doubt that this was a joint organisation. I can’t speak for Mike but I would suspect he does believe he is criticising his former employer.

Second, I agree that questions about the economic analysis relating to house prices inside the Central Bank are valid ones. I would point out that institutions like the Central Bank are not monoliths in which everyone holds the same opinion. One example I’d give is this paper by Gerard O’Reilly and Kieran McQuinn
http://www.centralbank.ie/data/TechPaperFiles/15RT06.pdf

Look at Figure 4 at the back. They were estimating that house prices were over-valued by 15% at the end of 2005. According to ESRI\PTSB house prices then went up another 12% before they peaked in February 2007, so their model’s estimated overvaluation was probably above 20% by then. Of course, house prices have fallen by more than 20% but their model calculates an appropriate value for house prices taking GDP as given and since 2007:Q1, nominal GDP has declined by about twenty percent.

Ultimately, though, decisions about what to say about house prices in official documents — as opposed to working papers by staff economists — were taken at the highest level.

@KW

It is clear that house prices have a huge effect on the broader economy.

Should we be asking what analysis the central bank did on the effect that the anticipated 20% drop in house prices would have on the broader economy in the context of the huge personal leverage and the volume of equity release which had taken place over the last decade?

The references to “soft landings” seem somewhat moronic in hindsight.

@ Zhou

Many incorrect predictions appear moronic in retrospect! This wasn’t really a prediction that prices would fall by 20%. It was that they were 20% out of line with fundamentals — one way that things could have become realigned was by fundamentals continuing to improve and prices staying flat for a while, i.e. the soft landing scenario. This is mentioned as a possibility in the paper.

But, yes, once the misalingment started to get as big as it did, the soft landing became increasingly unlikely. And once prices started to drop, the unsustainable share of employment in construction was going to drop fast. As the over-valuation started to get big, the risk of a nasty landing got bigger. Layer the biggest global recession since the 1930s on top of it and we are where we are.

Note, I’m not trying to defend the CBFSAI’s performance during this period. But it’s worth making a distinction between, on the one hand, research done by people trying to understand what’s going on and, on the other hand, official pronouncements in which “the soft landing” is always going to be the baseline scenario.

@Cormac Lucey
As in every other mature democracy the government are RESPONSIBLE for the state of the country. This country has had an economic Chernobyl.
Therefore the government are responsible for the economic Chernobly and should be long gone.

They knew they had constructed a gravely unstable economy. Even if they were never explicitly warned, repeatedly, in writing (are governments ever?), that it would explode quite so disastrously they always knew there was a serious risk it would explode. They are in no way relieved of the responsibility they carry from being THE GOVERNMENT. The government were warned many times by international and Irish experts. They knew they were taking a huge risk. They assumed the international economy would go on growing forever pretty much interrupted. That was taking a huge risk. Many in the PDs used to complain of low standards in high places. Our FF/PD/Ind governments of the last 12 and a half years angrily reject that they should be subject to ANY standards.

FF/PDs/Inds means NO STANDARDS IN HIGH PLACES.

@KW

Hindsight is indeed 20:20 vision!

I get the impression that many lessons have been learned internationally on the performance of the housing market when equity has been released for personal consumption.

I would like to know if our analysis of the side effects of the hoped for soft landing on the wider economy sufficiently well informed and rigorous.

I take the point about the soft landing being the base line in public utterances. I would be interested to know how the likelihood/risk of a soft landing as opposed to a sudden stop were weighted in presentations to governments. I would also be interested to know what reliance was put on representations, analysis and figures provided by the private banks.

The risk management strategy of the Central Bank/Financial Regulator which gave rise to the quality, degree and scope of risk analysis must now be under the spotlight. This is not a criticism of all the individuals involved.

@Karl Whelan

Karl,

You have been in the position of being an employee in a public sector organisation and now, while still in the public sector, having the freedom to express your own views publicly on issues.

Isn’t it important to acknowledge that it is rare for people who are doing very well financially to risk their own interest by taking a public stand even when it would be the morally correct position to do so?

Whistleblowers in every society are despised even by individuals who believe they have a moral compass.

Personal relations also dictate actions.

While recessions are rare and crashes like the current one rarer, it’s striking how no senior public servant publicly opposed reckless public policy.

For example, Jim O’Leary and colleagues in Maynooth, showed in 2004 that benchmarking was a fraud on public funds – – the first benchmarking body did not even feel compelled to publish the basis of its findings – – the default reaction was to go with the flow and take the manna from heaven.

A Central Bank is a key institution in any country but in Ireland, there was no countervailing force to boomtime politics.

When you were in the CB in 2006, that crazy year of the boom, when the biggest bank AIB was selling part of its HQ to an overstretched developer,
Seán Dunne, did anyone there wonder if the senior management were failing in their duty to the country?

The truth about the banking crisis is that the Central Bank was scared of opposing political conventional wisdom and it allowed banks pander to the short-term requirements of their majority owners — mainly overseas hedge funds – – and senior staff.

Like most issues, it comes down to the balance between self-interest and common interest.

Where there is a weak governance system with limited accountability and a culture of corruption and cronyism, self interest is the default winner.

@MH

If the system relies on individual civil servants to fall on their swords losing their jobs and pension entitlements then the system is broken.

Also, if somebody provides advice and it is rejected then they have to live with that because it is not their right or responsibility to attack the institution they work for.

If the advice was provided then the records will show it. If people did not put their views in writing becasue of fear of FOI then that is a problem. However, the fact that views may well have been expressed to senior officials and possibly to politicians will be relevant.

@ zhou_enlai

Zhou,

What you say is true but it is important to recognise the issue of self interest in a public debate when seeking to identify the villains of the crisis, in particular that whether in religious or other organisations, people generally go with the flow and keeping the head down generally pays dividends. Who gives a damn for sacrificial lambs?

Of course a system of laws and accountability should have primacy but the Irish generally don’t have much time for that.

So board members on the quango list of possible appointees to the hundreds of State boards, go with the consensus; politicians in governing parties stay silent rather than risk promotion opportinities; private sector businesses on the inside track of public procurement, milk the opportunities, in an archaic system and the management at the State broadcaster RTÉ facilitate politicians in power and the primary interest of its staff is themselves – – even though they would ostensibly subscribe to the mission of serving the public interest .

Why would they do otherwise?

Responsibility also extends to an electorate and whether it was dancing to the tune “Arise and follow Charlie” “or more recently, being the mice to some other pied piper, the lure of money, fame, career advancement or security, was not alone the preserve of commercial bankers.

@ yoganmahew

I agree with you regarding the culture of not taking responsibility in Ireland. I also think changing the system after the lessons of the enquiry have been learned goes in tandem with those that were responsible taking a fall. Changing the banking system cannot happen without these people taking a fall as the cosy cabals would still be in existence if they didn’t.

I definitely feel that those responsible should not be getting golden handshakes when they are disposed of and if there is any illegality they should face the full rigours of the law……..do we even have laws to deal with this type of thing!!!!!

@zhou
“If the system relies on individual civil servants to fall on their swords losing their jobs and pension entitlements then the system is broken.”

I agree. The system catastrophically failed and remains completely broken. Honohan is an effective piece of emergency surgery but the underlying body politic remains completely sick. There were many warnings, from abroad and from within Ireland. If Honohan had been appointed well before the bubble burst things would have been different. But he would never have been appointed to any powerful position by an Irish government before this crisis, let alone by FF/PD/Inds to the governorship of the Central Bank during a lending bubble.

The government chose people who would go along, and they went along. Now the government are getting away with blaming their own appointees for doing what the government appointed them to do. Only in Ireland.

@Jonathan:
Any relation to Jonathan Larbey, who writes press releases for Irish Liquidations, which provides the Director Insolvency Advice to which you refer?

bjg

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