Could it be that price is what people are prepared to pay? Did I read that on pg.1 of “Teach Yourself Economics in Five Minutes”?

As I’ve been saying on this thread and on my own blog, nothing that contributed to this mess was either difficult to see or difficult to understand. The belief that all was well and would be well was the preserve of the complete fool.

I read your comment with a lot of interest. The question remains now, why can’t the politicians in FG etc, who protest a lot in Oireachtas discussions about lending to SME’s - why can’t they sink their teeth properly into this subject? Why can’t they seem to unpack the whole debate about SME’s? We have seen a lot of innovation reports, a lot of promises for jobs, new era etc. We still haven’t seen a decent breakdown of facts with regard to SME in Ireland. I honestly don’t think we have a handle on this issue properly in Ireland. Yet everyone throws around this buzzword, SME’s as if it was understood by everyone what it means. If there was half as much effort put into defining what an Irish SME could do to improve itself in 2010, and less ‘innovation’ reports, we would be a lot better off in Ireland.

Instead of tightening primarily on the property and property-development area, banks are placing barriers on lending to what will be the dispersed engine of recovery–the numerous SMEs that had never been borrowing recklessly because the funds weren’t available to them for non-property loans, even during the boom.

I asked a dumb question about the distribution of loans in AIB as recorded in Morgan Kelly’s spreadsheet provided to the Irish Economy blog recently. When I had first saw Morgan’s spreadsheet and the gigantic non-domestic loan portfolio, initially I was relieved thinking it must have been invested in business and enterprise abroad. But the responses I got on that thread suggest that most of AIB’s foreign portfolio was property related also. I read David McWilliam’s article in the Sunday Business Post today, Cowen put competitiveness before compliance for banks, where he offers some suggestions as to rules regarding collateral and balance sheets which can play tricks on your eyes. It is well worth reading what McWilliams had to say. He has a point, as the asset prices are tied to lending, the more that is lent, the better the asset price gets and so forth. We really did get ourselves ensnared in that web in Ireland. BOH.

http://www.irisheconomy.ie/index.php/2010/05/30/morgan-kellys-bank-loss-calculations/#comment-54484

“Groupthink” is akin to “culture” and it is too easily accepted as an excuse. As I’ve said on my own blog (http://colummccaffery.wordpress.com/2010/03/01/who-would-pass-the-challenge-the-culture-test-decent-people-thats-who/) “It is alarming that so many people seem to think that the holder of a post is not required to take some sort of stand against wrongdoing or stupidity. It is certain that many of our scandals rest on past acceptance of this contemptible nonsense. Now it needs to be up-rooted to ensure the appointment of people of better character.

Very few of us will get through life without being asked at times to make some kind of stand and it could be argued that such tests are necessary to a full life.”

How far do you think your average criminal in the dock would get with a defence based on groupthink? “I’m neither innocent nor guilty. It was groupthink, a culture of robbery. We are where we are. It’s time to move on.”

On the specifics of journalism, the Irish broadcast media generally does a poor job during election campaigns.

While Eamonn Gilmore will likely have a place in the main leaders’ debate, what would be more important is a lengthy one-on-one interview with all the main party leaders where an informed interviewer would forensically go through policies/aspirations in the style of the late Tim Russert of Meet the Press - - not a format where the interviewer is seeking ‘gotcha’ moments but one where viewers could see through pre-prepared spoof answers.

The politicians are usually saved distress in short format interviews because
interviewers often do not have the key facts on an issue.

“It was decided in 2006 to exclude from the main text of the report data and references to a likely 15 per cent house price overvaluation that was contained in a themed research paper”

Full Indie article at

http://www.independent.ie/business/irish/central-bank-hid-property-crash-forecast-2218968.html

It’s not a question of reform in RTE; journalism itself is a problem.

Isn’t groupthink as common in every other professional group?

Whether in law, journalism, teaching, medicine, the public service etc., an individual who has spent his or her whole adult life in one particular area, is likely to socialise also with similar people and share the same outlook.

It’s not going to change.

George Gallup twigged to this many years ago.

I think the era of brown envelopes is probably dead.
However the era of loans with flexibile repayments dates and terms is probably only coming to the surface now.

It’s not a question of reform in RTE; journalism itself is a problem. When the arguments were raging about the start up of independent radio, we heard how “RTE’s monopoly” had to be broken so that we could have access to a greater range of opinion. Here’s my advice: wait until the clock comes round to a big news anchor point, then start pushing the selection buttons on your radio. What you’ll find is this: the news content, presentation and angle is the same. A similar exercise can be applied to other genres (e.g. business programmes) with the same result. Yep, if you want choice, competition won’t deliver it!

It’s all going to be blamed on the poor quality of/terrible advice given.

The counter to that is obviously “well if that’s the case and you are now aware it was poor, why are you still on the same track?”

…but is there a journalist in RTE who will actually challenge rubbish when it is laid out before them?

The report provides no support for those who make such allegations of cronyism, corruption or malign politicial influence. Some people will always hear, read and see what they want to read, hear and see. These allegations remain speculation based on political bias.

The prospect of directorships and for other non-board staff, higher paying jobs in banks, could never have influence?

In the US it has been a problem and a former SEC chairman, Arthur Leviit, is almost 80 and on Goldman Sachs’ payroll as an “adviser”.

For senior civil servants, the prospect of nixer assignments and agency appointments, gives them an incentive to remain quiet.

The issue of cronyism was relevant through through the influence on policy; as for corruption, anyone who believes that the end of the brown-envelope era made the land rezoning bonanza free of corruption, is a fool.

RTÉ’s Prime Time programme highlighted in November 2007, the involvement of elected representatives in the land, development and property business.

A total of 22% of councillors dealt in or developed land through their day jobs as estate agents, landowners and builders. In Mayo, that figure rose as high as 45%; in Offaly it was 44% and in eight other counties it was 33% or more.

Prime Time found that in Clare, declarations of interest showed that 97% of elected members had no beneficial interest even in their family home. In ten counties, two-thirds or more of the councillors had not declared an interest in the family home.

The programme was broadcast 10 years after the establishment of a public tribunal to investigate planning corruption.

Several lawyers became multimillionaires from the two State corruption tribunals; some have earned almost €10m and when they were paid an extra €1m due to a typing error, they were allowed keep it.

The Department of the Taoiseach said in early 2009 that the tribunal had saved €1.1m elsewhere by paying other staff less in salaries and fees.

The rich are subject to different rules!

I can’t resist copying here an email I sent to a friend (retired banker) this very afternoon:

. . .

During the boom years, it seemed to me that the “reckless lending” was mostly related to property purchases (commercial & residential) and to property development. During the boom years the property bubble sucked up most of the loans made. Other entrepreneurs have commented that their employees could easily get mortgage loans for 500k, but the business that employed all of them could not get even a small loan for 20k. (True story told to us by a very successful serial entrepreneur.)

Now with tightened underwriting, it seems that ultra-tight criteria are being applied to small businesses–who were not part of the reckless lending problem in the first place. Instead of tightening primarily on the property and property-development area, banks are placing barriers on lending to what will be the dispersed engine of recovery–the numerous SMEs that had never been borrowing recklessly because the funds weren’t available to them for non-property loans, even during the boom.

The SMEs are getting overly penalized by the harsh lending environment. The innovative SMEs who have a different financial profile and different financial needs are perhaps suffering the most–though perhaps that is just my bias.

As regards responsibility McCreevy explicitly puts it all on Cowen (and Lehmans presumably). Cowen on the other hand implicitly puts the bulk of it on McCreevy et al (and Lehmans). So they both agree there IS someone responsible. But they both agree it’s someone else.

Here is a thought experiment. What if either Cowen or McCreevy had been MoF between 1997 and 2008 and were now Taoiseach. Would they then accept huge responsibility for the three collapses? Even in this case I don’t think they would. FF/Ex-PDs just don’t believe in (their own) ministerial responsibility, let alone collective cabinet responsibility.

My judgement is that Cowen would not accept this was a resigning matter, no matter what his actions and inactions were, or how long a period he’d been the minister.

“Right processes, wrong type of people for the positions”. & if that is the case, then to fix the problem, then the people need to be replaced. Nothing bad about the people, it is just that the positions they filled were not a match for them and a career change might be appropriate.

Some of the risk people might do better in sales and some of the regulators shouldn’t be in positions where the ability to fight the unpopular but necessary fights is a major requirement for the job.

It is easier to change a process than to change people. Hopefully the people will change, however, I’m not so sure it will happen.

You forget (c) it’s summer; exams are over (and may even have been marked) but there may still be grading committees and exam boards and other end-of-year stuff to be done. And then the villa in Tuscany (or the econometrics conference in Slough) beckons ….

bjg

This is an economists’ blog. I understand that but there’s a tendency to miss the wood for the trees. Sure, a great deal of the problem originates in ultra liberal doctrine. Sure, some of the decisions were more complex than others.

However, this problem was apparent for years. It took wilfull stupidity even on the part of liberal ideologues to fail to see it. I said in a previous post that the specifically Irish part of the problem was obvious. Any fool with an eye to see realised that employment in industry was falling, that there were unsold homes in some very odd places, that people’s borrowing had reached insane proportions, that prices were silly and that the media were still on about the “property ladder” for the young and a “property portfolio” for their parents. On the wider front, sensible people shook incredulous heads as the guff about “products”, “leverage” and “derivatives” was ladled out by people who should have known better.

FF knows it is destined for opposition after the next election. FF also knows there will be a long term judgment as well as a short term judgment. The short term is lost. The longer term might be salvaged.

Cowen had the power. He misused it - by his actions and inactions - on a massive scale.

The international crisis has not helped imho:
- lost revenue and jobs,
- greater difficulty in engineering a recovery in a depressed world,
- exporters’ loss on currency fluctuations,
- multinationals accelerating cost cutting,
- international fear of contagion between financial institutions,
- international concerns about sovereign debt,
- huge increases in risk aversion internationally.

‘The current Government can take tough decisions because they, particularly FF, are playing a longer game than the other parties’

Is that really true ? It’s critical to distinguish between a party which is expert at creating the illusion of social responsibility, and a party which actually demonstrates that quality when the chips are down.

While the governing party has much to it credit over the decades, the crazy fling with the developers/banks may have ben the cause of its final undoing. Like the Ulster Unionist party, FF as a force may be on the way out. As someone reared to respect Dev, I get no particular satisfaction from that, but it’s better to be realistic.

The decisions you mention are being forced upon the government by Mr Market and Europe. As they say in the US, it’s time to shit or get off the pot. I feel that the really tough decision would be to resign, but it seems we don’t do that sort of honourable thing in Ireland yet. Maybe we are still stuck at an adolescent ‘game’ stage of political life.

@ Yogan
‘With competent people in place, the systems will take care of themselves’

The reports confirm, and everyone accepts, that there has been serious incompetence and that the situation needs to be rectified. What has not been explored is how much of that ‘incompetence’ was deliberately engineered or encouraged.

The art of paying lip service to various ideals is well developed in Ireland
Those ideals are found in religion, politics, business and many other spheres. In the past it was variously necessary, for progress in Irish life, to display obeisance to the landed gentry, the Church, or to some respectable and appropriate political creed. More recently the meme has been about respect for business and good business practice. And of course the wealth which it promises.

It is the mark of the politically successful to be able to move smoothly through ideological climates over time, while always staying in the saddle. As the sociologist Pierre Bourdieu puts it, it is the ‘art of maintaining ones position by constantly changing ones stance’

The cute hoor knows how to applaud transparency while making sure that the real decisions get taken in secret, and preferably off the record. No fingerprints and no paper trail. Bad systems, balkanisation and bureaucracy are necessary for efficient siphoning, and protecting the public’s confidentiality often translates into protecting the insiders. A protection racket masquerading as social protection.

Here’s a question for youz economists:
‘What were the major principal-agent problems which characterised our bubble, and how should they be addressed ?

The advantage we have gained from the international crisis is that the ECB has been incredibly accomodative in both interest rate and in funding terms - rates at 1%, unlimted repo operations, nice haircuts on toxic debt (as long as it is initally wrapped nicely), and now bond purchases.

Never mind the “what situation would we be in if we weren’t in the euro”, think about the “what situation would we be in if we were the only ones having a bust”.

Nobody disputes that it was a plain vanilla bubble. The Govt have accepted that, with hindsight, they didn’t do enough to contain/prick the bubble. There is no doubt that international factors have greatly exacerbated the consequences of our homegrown bubble to make things much worse and more difficult than they would otherwise have been. “Lehman Bros”, as annoying as the refrain is, was a watershed in terms of things going south and policy options in dealing with banks becoming much more fraught.

The Government is more accountable to the people than any of the other organisations involved. There will be an election in due course. Most people expect there to be a new Government and Taoiseach after that election. In the meantime, I don’t think the report suggests that shorter terms for elected governments will lead to better policy. The current Government can take tough decisions because they, particularly FF, are playing a longer game than the other parties. I think we should hang on to them while we can.

In most organisations that have seen such a massive systems failure as seen here, thos accoutable for that systems failure would be replaced. The heads of the CB, FR, various bank CEOs have all been shuffled off into comfortable retirement…undoubtedly too comfortable.

In politics, the Minister of Finance who comes is for criticsism has been promoted to a higher office. Once again, I agree with Yogan. That is twice now.

We must ensure that stupid people are not elected to important public offices. We must ensure that even if stupid people are elected, they cannot appoint other stupid people to positions of economic importance.

Patronage must end. Transparency must improve. With competent people in place, the systems will take care of themselves.

I don’t see how the reports can be read as anything other than a severe criticism of the current and previous governments.

There is no evidence that we know of. Nobody familiar with what happened supports the suggestion. At the same time, people are being frank and other serious failings are disclosed such as the senior regulators over-ruling junior regulators. The report provides no support for those who make such allegations of cronyism, corruption or malign politicial influence. Some people will always hear, read and see what they want to read, hear and see. These allegations remain speculation based on political bias.

This report is serious for the Government. Having the failings they previously admitted spelled out in black and white does make a difference. Also, the criticism of the inclusion of subordinated bonds in the Guarantee is serious.

However, the truth is always more prosaic than we think.

The system failed due to the State competing with other states with light touch regulation, due to an internationally prevailing market based ideology, due to an international view that the Great Moderation was here to stay, due to structural weaknesses in the Civil Service, due to failings on the part of individuals, due to the nature of cultures in organisations, due to structural weaknesses in the accountability of bank boards, due to no effective shareholder oversight mechanisms in our banks or abroad, due to classic bubble politics where the parties all chased the electorate with gifts (FG were going to abolish stamp duty to prevent the property market slumping, Labour were going to increase the structural deficit by lowering income taxes), and due to a national attachment to property.

No doubt those at the top influenced each other. Perhaps banks should not have social occasions with regulators or politicians as it can lead to group-think which can be just as dangerous as corruption.

The reports reveal serious issues which need to be addressed. Spinning the report as primarily an indictment of Brian Cowen, as Enda Kenny is trying to do, has nothing to do with helping us to identify and effect the necessary changes.

FF are now wildly spinning the reports as fundamentally exhonerating them by trying to focus the entire debate on what they said about the guarantee. But Honohan’s investigation, which they agreed to with extreme reluctance, could only take a view based on the limited evidence it was able to collect. Perhaps this view is correct but it can’t be said with any certainty. It is best then, with regard to the guarantee, to treat it as only a fact uncovering exercise. It tells us much we didn’t know about it. That is all.

The focus of debate should instead be on what the reports reveal about the greed, recklessness, chicanery, strokes, cronyism, arrogance, incompetence and chronic dereliction of duty that preceded the night of the guarantee. These are going to continue unless we have a governance revolution so that is what should be debated. Anyway it is only sensible that this should be the case as the government’s defence is that the guarantee was precipitated because the entire financial system, that they are ultimately responsible for, was about to collapse. Their defence is their indictment. So lets everyone discuss what I mentioned in the first line of this paragraph.

P.S. I remember Newstalk’s Breakfast Show and Prime Time also heavily featuring the need for an inquiry so well done to them.