Economic Policy Advice to the Government Prior to the Financial Crisis

Economic policy advice on reducing the risks to macroeconomic and financial stability from the housing market, restoring competitiveness and preparing to adjust in a downturn was available to the Government prior to the financial crisis.

In a research paper which I presented in the plenary session of the Annual Economic Policy Conference in Kenmare on 13 October 2006 (attended by a good number of senior civil servants), after discussing the adjustment mechanisms available to Ireland as a member of the European Economic and Monetary Union, I pointed out four main challenges facing the Irish economy and suggested a combination of policy measures to respond to these challenges. The four challenges that I identified were as follows: 

a)      maintaining a high potential output growth rate

b)      restoring competitiveness

c)      managing potential risks to macroeconomic and financial stability from the housing market

d)      adjustment to a slowdown in the United States and an expected appreciation of the euro against the dollar

 The policy measures suggested to respond to these challenges included the following:

     a)      fiscal tightening to reduce domestic demand pressures

     b)      a wage restraint in the public sector

     c)      fiscal measures to reduce the risks to macroeconomic and financial stability such as phasing out the tax relief on mortgage interest payments, a tax on imputed rents, a broader capital gains tax, or  a property tax on vacant of secondary dwellings (as options available to the Government)

    d)      limits on the use of real estate as collateral to protect the banking system against over lending and bad loans

    e)      running a large fiscal surplus during the current boom to prepare for a downturn in the world economy

The Irish Times of 14 October 2006 covered extensively my main points. The paper was published in the Quarterly Economic Commentary in March 2007.    

65 replies on “Economic Policy Advice to the Government Prior to the Financial Crisis”

Well done Julia! Pity you did not do it in 1999!

However, did any of the ignorant public servants betray any interest or concern whatsoever, that is not already in the public domain?

Did you consider that the USA was in depression in 1999, but decided to throw the banks and sub-primes and primes but greedy to use housing as ATM to the wolves? Had any of that any influence on you?

Did you get any questions on that presentation? It would be interestign to know what kind of impact it made. This issue of no-one shouting stop it nonsense anyway. I was doing an UG econ degree at the time and lecturers were non-stop talking about our lack of competitiveness.

By October 2006 it was way too late.

Comment and action needed to be in 02, 03, maybe 04 at the absolute latest.

It was like the emperor with his new clothes. This time it was different. Everybody who was anybody was in agreement. There was an example of the phenomenon following the France -Mexico match last night. É. Dunphy and R. Whelan explaining how the Irish players love to play for their country . It’s because they are Irish and Ireland is great , not like France. It was the same thing with the economy. A great model and sure nobody could say anything about it. Look at the Annual Report of Anglo Irish from 2007 and feel the arrogance .

Or check out the 2007 presentations from Irish Life and Permanent about the pensions opportunities in the glorious Irish future.

@Iulia Siedschlag

As a matter of interest, did you have much or any interaction (informal or otherwise) with officials from the Department of Finance about your paper? Was there any mechanism for ensuring such interraction and consideration of our paper with face to face meetings took place? There is no point in havnig an independent think tank if people don’t have to talk to them?

This advice was presented in October 2006 and not published until 2007. Rogoff and Reinhardt correctly put the peak of our property market at October 2006. Whilst bank lending for development was still mental the market was correcting (too late) with purchasers, valuers and many developers all pulling in their horns.

I expect it takes a minimum of 4-5 months for papers published by the ESRI to turn into policy. In the meantime there was a general election which was occupyin politicians minds and energies. The earliest your paper could have become policy was therefore likely towards the end of 2007 or beginning of 2008.

Minister Lenihan has said that much of the dissenting advice was late in the day. I don’t mean to be offensive but I think he might put you in this category.

I dont think Iulia was telling people things they didn’t largely already know. If senior folks in d/finance needed to be told that increasing government expenditure by >10%pa was a bad idea then heaven help us. In fairness I wouldnt have thought that was the case.

Good for you Julia. But while individual analysts (like yourself) concluded that fiscal policy was too loose at the time, no reputable official body decisively supported that analysis.

I fear that there is a large measure of intellectual dishonesty afoot in the economic community which concludes in 2010, with something close to unanimity, that Ireland was running a structural deficit for many years of the last decade. But when one examines detailed contemporaneous comments, no such conclusions were offered at the time.

For instance, Herr Regling now concludes now “The conclusion is that overall fiscal policies were pro-cyclical during most years up to, and including particularly, 2007 thus adding markedly to the overheating of the economy.”

But as late as March 2008, the Economics Directorate of the EU Commission (which he headed) stated in “Ireland: Macro Fiscal Assessment – An Analysis of the December 2007 Update of the Stability Programme”:

“Despite the weakening in the budgetary position in 2007, the medium-term objective, which is a balanced position in structural terms, was reached by a large margin.”

I believe that there was an intellectual failure by most economists to clearly see what was happening at the time. Good for you that you saw it. Shame on those who would move the goalposts rather than admit error.

Now that the banking reports are published, maybe we can see some action on the banks? Maybe a limited guarantee and some reform of the financial regulator… oh, wait, nobody waited for anything to be published before acting in September 2008.

The problem still is, as it was then, that the government (all governments?) only listen to people who are telling them what they want to hear. All else is dismissed out of hand without the slightest analysis of the underlying data, the assumptions, the conclusions, the risks.

What can be done to address this? Perhaps the Central Bank needs to operate its own forum where individuals can submit papers to it and they will be responded to. At the very least, the intellectual exercise would be good for the brains that make decisions. At best, it would give an open view of policy and widen (and so flatten) influence. Who knows, we might even see the next train coming before it flattens us?

@Cormac – I agree absolutely with you. The failures were widespread and deep and ideologically driven. The most dangerous of the ideologies was the idea that economics was a science, that there was no ideology behind it, that the economy could be quantified and controlled and that modelled theory reflected absolutes rather than impressions.

The views expressed by civil servants in Kenmare and during discussions later on centered on two points: 1) the Government could do nothing about decisions taken in Frankfurt and Washington; 2) our financial system was rock solid and banks were well capitalised. On the first point, while I agreed that the Government could not influence those decisions, I suggested that fiscal policy could be used to deal with the consequences of those decisons, in particular the pro-cyclical effects of very low (negative) real interest rates. Fiscal tightening, wage restraints in the public sector, and property taxes were unpopular measures but I think that if taken in 2007 would have reduced the magnitude of the economic downturn. On the second point, given the extent of over-lending it seemed to me that there was a need for a prudential supervison of the whole banking system. I would have said those things earlier if I had the opportunity. I started in the ESRI in January 2006 and before moving to Dublin I was a Senior Researcher at the University of Bonn in Germany.

@Iulia Siedschlag

I note that you pointed out the problems as soon as you could as you were not based in Ireland previously.

Thanks for the insights as to the civil servants’ mind-sets. It is interesting that they were under the impression that the banks were rock solid despite the degree of the banks leverage not being hidden. One wonders if others should have spotted the banks’ precarious position (including the rate of expansion of the loan book) notwithstanding the failings of the Central Bank and the Financial Regulator. It seems harsh to blame Brian Cowen for not second guessing them when the financial community generally missed it too!

The ugly foot note to the Civil Servants and others thinking the banks were rock-solid was that this opinion was adopted by the general public who put their savings into thes “rock solid” “blue-chip” companies. I note your comment that you felt the banks needed better supervision – I am guessing you addressed that point in a different paper.

Large credit booms and strong real appreciations are among the best indicators of banking crises. I was also concerned that there might be systemic risks which were not visible in individual bank balance sheets. I mentioned this point during discussions in Kenmare and later on.

@ Julia

You state “the Government could do nothing about decisions taken in Frankfurt and Washington”. Whilst this is technically true I fear that it may lead to economists from copping out.

In my view EMU is central to what has gone on in Ireland, Spain and Greece. The effects were compunded by weak / non-existent financial regulation. See the March 2008 OECD paper “Monetary Policy, Market Excesses and Financial Turmoil” for details of the EMU effect.

If we all conclude that “nothing can be done” about EMU then we will tend to look past monetary policy for explanations of the crisis we now face. But there are, in fact, a number of things which we can do:

1. in public debate, we can highlight the role which EMU played / plays in facilitating large financial imbalances within the Eurozone. I expand on this point in the current edition of Business & Finance.

2. we can influence political debate towards the goal of an eventual Irish exit from EMU. I would guess that it would not be economically practical to exit for at least 5 years but at some point ti will be possible to contemplate exit without triggering an immediate bank run.

3. we can influence political debate towards the more immediate goal of decoupling EU and EMU membership. It is mistaken for the EU to insist that EU candidate states make a treaty committment to also enter EMU at the the earliest practical opportunity. If Ireland, Spain and Greece were not good candidates for EMU (in terms of classical OCA analysis) why should Romania or Bulgaria be forced towards it?


I am saying that good fiscal policy could and should deal with the consequences of international developments including macroeconomic adjustment in the EMU. Membership of the EMU has been good for Ireland and small open economies such as Romania and Bulgaria would be better off adopting the single currency as soon as possible. This follows from the fact that with full and free capital movements small open economies face a trade off between currency stability and an independent monetary policy (“The Impossible Trinity”). The traditional OCA theory is not relevant for the EMU.

@Cormac Lucey “I fear that it may lead to economists from copping out”.
I fear it is more that EMU is being used as an excuse to cop out – EMU implied well understood discipline. Other countries have shown that EMU did not result in economic meltdown there. We are still being told our crisis is largely due to external factors when the opposite is true.

Many (independent) economists gave warnings, although in hindsight not vehemently enough. Telling people ‘I told you so’ adds little to deal with our problems now, and in general I would much prefer to concentrate on solutions. It is however important to set the record straight especially when some people are trying to invent history.

In that context here are a few published warnings:

“In the Irish economy there is a considerable exposure to any disturbance affecting the building sector…. Given the high level of indebtedness of the household sector, many households are not in a good position to sustain a prolonged loss of employment. Such a fall in confidence could precipitate a much more dramatic internal adjustment process…..”
“This also implies that the government should run a surplus due to a postponement of some investment which will be available post-2010 to finance the higher investment programme even if the public finances had been hit by an economic slowdown.”
Both from a report that was published in October 2006:

or this from a similar report published in October 2003:
“The inflation in the housing sector can have knock-on effects elsewhere in the buiding construction sector, as well as impacting on overall competitiveness of the economy. Under these circumstances it is important to reduce demand pressures in the housing market…”….. “For example, the various tax reliefs and grants that add to demand should be abolished.”

It is easy to add to this list.

A person reading the discussion on this thread to gain some understanding of how policy decisions are arrived at in Ireland (or in any of the other established EU democracies that suffer from executive dominance) might form the view that policy options are developed, tested against evidence from theory and practice in other jurisdictions, refined, subjected to further scrutiny and then the best, or least bad, option is chosen and implemented.

In reality most policy decisions attempt to balance competing interests advanced by lobbyists and are made quite rapidly guided by gut political instincts. Civil servants are then required to forage for selective evidence to justify the decision and most of the effort is put into getting the right spin for public consumption.

Even when “independent” consultants are retained to identify and evaluate options and to make recommendations their ToRs are defined so tightly (and they are left in little doubt about which way the wind is blowing) that they have little choice but to recommend the option that has already been chosen. However, they serve a purpose as they put a veneer on the spin and provide it with a patina of spurious objectivity.

It wouldn’t have mattered a whit if every living, non-freshwater, Nobel Economics laureate had assembled weekly in front of Government Buildings since 1999 to plead publicly for a counter-cyclical fiscal policy, reform of the sheltered and non-traded sectors and proper regulation of the banks.

What’s done is done. The challenge now is to establish a proper process for policy formulation, evaluation, scrutiny, decision, implementation and review.


I think a lot of those warnings fall far short of predicting the banking crisis, private wealth destruction and economic contraction we have seen.

If somebody said “failure to take immediate action to resolve the structural tax deficit and to make financial regulation far more rigourous and to achieve a structural surplus of a degree far in excess of the requirements of the Stability & Growth pact (which is an worthless measure of sovereign economic health) could lead to cataclysmic results including the decimation of our banking system and the wholesale destruction of private wealth” then I imagine even the Department of Finance would have sat up and took notice. The closest we got to it was Morgan Kelly and that was after a lot of the damage was done and the debate had already moved on to how to prick a bubble (although if MK’s predictions had been taken on board by the DoF then much damage might have been averted). Many Irish people had pensions and diversified investments that re destroyed by the international crisis. One wonders do people realise just how much private wealth has actually been lost.


I think you make a good point about how the Irish authorities view international factors. On the one hand they make a conscious decision to fashion a “small open economy” otherwise known as “one of the most open economies in the world”. They also make the conscious effort to position Ireland in the EU and to adopt a common currency. Then they abdicate all responsibility for not only helping design the international financial system which we have opened ourselves up to. They further consider it intellectually legitimate to portray the vagaries of the globalised economy as something like an unpredictable weather system beyond their earthly control while at the same time neglecting to take appropriate precautions to insulate our country against these weather systems they have chosen to expose us to. This is a gross intellectual failure imho.

@Paul Hunt

Your post nearly suggests that our State ploughed a lone furrow independent of other countries to satisfy vested interests in Ireland. In fact, in line with the “copy-and-paste” and “google-that” mentality which pervades modern Irish life, we adopted the methods and views of the Washington Consensus, of the Great Moderation, of The End Of History, of The End of The Cold War, of Globalisation, of the WTO, etc etc which resulted in the creation of
Ireland Inc and the wedding of the State with private commerce rather than each keeping a wary eye on the other.

It is interesting that the global debt-fuelled bonanza of the last 30 years has co-incided with post-modernism in social sciences and cultural life. The central notion of postmodernism is that there in no such thing as objective truth, and that all claims to truth are simply a ‘narrative’. Some pretty ugly things have happended under that flag.

Media have increasingly been dominated by corporate interests, whose commitment to society or social development is negligible. What matters is business and global market share. One of the casualties of the ‘copy and paste’ and ‘google that’ process has been the practice of objective public-interest journalism.

Most of our institutiions have been engulfed in this process, to the detriment of traditional politics and governance. Intellectual life has suffered within and without the universities, as the soundbite and the opinion piece has proliferated.

The disorder is worsened by the rapid movement of persons from positions of power between positions in the public and corporate sectors.
Even the US system of scrutiny of public appointments is failing because the criteria for ‘conflict of interest’ have been subject to manipulation.

The result is a corrupt ‘decision making’ process, which is more or less naked in various jurisdictiions. Even states which are relatively well governed have turned a blind eye to the overseas activities of their banks and corporations.

Ireland tagged along with the postmodern crowd while the going was good, but there is only one world and it’s fairly objective. Irrespective of global recovery prospects, our position, as a nation, turns out to be a lot further down the pile than we thought. We bought the sales chat and we didn’t read the small print.

It’s not just the ghost estates which need to be demolished, it’s the edifice of complacency, BS and vested interests in and around our public sector.


No fundamental disagreement with your observation, but I clearly failed to highlight the crucial nuances that have left Ireland more deeply in the mire than most. Yes, successive governments, the ‘permanent government’ and the rapidly expanding quangocracy swallowed, hook, line and sinker, the global groupthink advanced by the neo-cons and Masters of the Universe (ably assisted by the useful idiots of freshwater economists and their disciples with governance responsibility). And, yes, this was swallowed, to varying extents, by most other OECD governments.

But I would contend that nowhere else was the gap between the rhetoric of “more competition and better regulation” and the reality on the ground more pronounced than in Ireland. “‘Tis the modern way now to put all these regulators and overseeing bodies in place, but shure, they’re only there for appearances and we’ll be able to work around them to get on with the real business.”


To find solutions for better policy making in this country I think it is important to understand what went wrong. That civil servants were required to provide evidence to justify policy decisions which had been made to serve group interests is what went wrong. This explains why independent evidence-based policy advice has been ignored. We all know that this what went wrong and this needs to change. Did we hear anything close to this in the two Reports on the banking crisis, I might have missed it. Instead we are told that there was no ecnomic policy advice prior to the financial crisis to suggest that the Government should prepare for a downturn. Clearly this does not stand up to a reality check.

@ Iulia

“I am saying that good fiscal policy could and should deal with the consequences of international developments including macroeconomic adjustment in the EMU.”

I disagree.

I would argue that the imbalance in monetary policy resulting from EMU is so large as to make unsustainable the imbalance in fiscal policy needed as a counterweight. It’s like the man with his upper body in the oven who thinks that the solution is to put his lower body in the freezer. But the solution is to take his head out of the oven.

Rossa White estimated in 2006, for example, that an appropriate policy rate for Ireland would have been 6% at a time when EMU base rates were just 2%. Have you computed the size of the fiscal surplus that would have been appropriate to balance that monetary stimulus?

Regling, in his recent report, at least had the good grace to admit that “not all statistical tools” to measure this “are available to make precise calculations” (page 13).

And that’s even before we consider the immense political difficulties that would have resulted in denying spending requests as a huge surplus built up, up and away.

The repeated breaches of the Growth & Stability Pact limits in the years before 2008 should have proved that, even with the force of treaty, it is politically impossible to run national economic policies on the basis of formulae. The fact that Germany is the member state which has most offended most frequently should cause us to pause for thought on just what is and is not politically (as opposed to technically) feasible.

@ Iulia

“The traditional OCA theory is not relevant for the EMU.”

Kokolores – it is of central relevance. How else should one judge the appropriateness of a country’s membership in a currency area?

@ Iulia
@ Edgar

Please do read the March 2008 OECD paper “Monetary Policy, Market Excesses and Financial Turmoil”, look at the graphs on pages 18 & 19. They show very strong correlations between the monetary boost which EMU imparted to certain members (such as Ireland) and changes in housing investment, house loans and house prices. In some graphs, the r2 measure exceeds 0.80.

And look at Germany.

Did it never occur to you that if (a) Eurozone interest rates were appropriate for the zone as a whole and (b) Eurozone interest rates were inappropriately low in Ireland that (c) Eurozone interest rates must have been inappropriately high somewhere else? The OECD paper shows that Germany was part of (c) for much of the last decade.

That’s a key reason why Germany property prices remained relatively depressed in recent years. And it’s a reason why there are so many Germans working here in Ireland today in utter contrast to the situation in 1991 (when I went to work in Germany) when there were very few Germans working in Ireland. And it’s a key reason why Germany was a serial offender against the S&GP.

@ Edgar

There were warnings from economists. But they were largely warnings that the Irish economy was overly focussed on construction. That was pretty obvious and should hardly be a cause for contemporary congratulation.

The question is whether there were warnings from influential economic bodies that a property bubble could lead to a banking bust. I am unaware of any.

In 2005, I wrote about the Irish credit bubble in Magill magazine (under a pseudonym, as I was a ministerial advisor at the time and didn’t wish to cause my master any possible political embarrassment),

“Where is all this leading? Simple. We can’t keep increasing our borrowings forever. The constraint on our indebtedness will not be interest rates as in previous decades. It will be our debt capacity. We risk maxing out on debt and thereby making ourselves vulnerable to any short-term economic set-back. The closest parallel may prove to be the Japanese economy. They too experienced a growth miracle built on a credit bubble induced by politically-determined interest rates. Their bubble was pricked in 1991. If their experience is anything to go by, the bursting of the Irish bubble would be a nightmare. The economy would prove impervious to monetary and fiscal stimulus, as individuals and corporations sought to curtail spending in order to reduce their bank borrowings. A downward spiral of asset prices, forced liquidations and further falls in asset prices could result. Growth would prove elusive and the financial sector would be in permanent crisis.”

Why could I – without formal economic training or degree – publicly describe the situation pretty clearly while no influential economic body did?

How did I have the independence of mind to write that – even though it went completely against my political interests to assert that our turbo-charged economic growth rate did not originate in government policy but in monetary policy – while the statutorily independent Central Bank snoozed in its basket?

Answer: I fear that many Irish economists lack the moral independence and/or intellectual capacity to analyse and to write clearly.

Now they join in retrospectively dubbing government economic policy 2002-2007 as running a structural budget deficit. They tip toe around the EU’s contemporaneous 2008 judgement that “Despite the weakening in the budgetary position in 2007, the medium-term objective, which is a balanced position in structural terms, was reached by a large margin.”

It’s easier to blame Biffo than to admit profound intellectual error.

But the economic cost to Ireland of continuing intellectual error will be 10-20 years of inappropriately tough monetary policy as we try to fix a broken banking system, broken public finances and broken competitiveness from a starting point of higher private sector indebtedness than anywhere else on the planet (except Iceland).

@ Iulia
“To find solutions for better policy making in this country I think it is important to understand what went wrong. That civil servants were required to provide evidence to justify policy decisions which had been made to serve group interests is what went wrong.”

I would be fascinated in any evidence you have to back that up, if you can.

But, having been in government at that time, I think you are quite wrong. The permanent government (DoF, CB, FR, ESRI) and commercial Ireland all believed that high economic growth was here to stay. They all failed to see any danger in a credit-fuelled property bubble.

Read the ESRI’s Medium-Term Review 2005-2012 published in December 2005 for example. The ESRI would have offered the most cautious note from within the establishment. But it was still rampantly optimistic compared to what happened. The lowest annual rate of GNP growth forecast in the “Low Growth Scenario” over the years 2004 – 2012 was +2.7%. That document also missed the centrality of the credit system in what was going on and the consequent risk of a banking bust.

If you aim to criticise the 2002-2007 government for seeking only evidence which supported its conclusions, you need to careful not to make that error yourself.

Bottom line: we made an intellectual error in underestimating the monetary stimulus from EMU in 1997-2007 and we are making an intellectual error in underestimating the monetary pressure EMU will put us under in 2008 – 2018. EMU will drive us from binge-eating to crash-dieting.

EMU delenda est.

“Rossa White estimated in 2006, for example, that an appropriate policy rate for Ireland would have been 6% at a time when EMU base rates were just 2%. Have you computed the size of the fiscal surplus that would have been appropriate to balance that monetary stimulus? ”
There’s more to fiscal policy than fiscal surplus…

Given much of the unsustainable nature of the bubble was property related, reducing credit availability, bank leverage, property tax breaks would have naturally reduced the fiscal surplus as reduced property activity would have led to lower levels of VAT, CGT and stamp.

It would also have had the happy effect of leaving the population less indebted.

PS we must learn to use fiscal tools to manage inappropriate interest rates from the ECB. They aren’t going to go away, you know.

Iulia – independent evidence based policy advice hasn’t been ignored. In fact practically policy decision made over the last deade has been based on muntiple ‘independent’ reviews by the major private sector consultancy firms. Whole rainforests have been cut down to generate sufficent paper for these reports and the vast majority of them are just garbage. Paul Hunt is correct in his claim these investigations are constrained by waterertight terms of reference – but this is only part of the story. Most of these agencies are simply concerned with telling the government what they want to hear in order to access more contracts. I have just completed a study into the (in my view) very problematic plethoria of initiatives to address spatial concentrations of poverty in Ireland. It is striking that each of these schemes has been positively ‘evaluated’ on muntiple occassions at God knows what cost to the taxpayer mainly by the large consultancy firms. Most of these studies are based princially on key actor interviews – ie we asked the designers and implementers of these programmes what they thought, they assured us the programme was great, QED is obviously is great. In contrast to the UK the Irish government only rarely funds serioius policy analysis by academics. The ESRI had almost a monopoly on this field in the 1980s, but that is far the case now and the quality of policy advice has disimproved radically as a result.

@ Yoganmahew
“There’s more to fiscal policy than fiscal surplus…

Given much of the unsustainable nature of the bubble was property related, reducing credit availability, bank leverage, property tax breaks would have naturally reduced the fiscal surplus as reduced property activity would have led to lower levels of VAT, CGT and stamp.

It would also have had the happy effect of leaving the population less indebted.”

I totally agree with you.

But my arguments against a fiscal policy balance to counterweight a monetary policy imbalance are:

a. technical – how would we measure it? The EU judged that Ireland ran a structural fiscal surplus in 2007 “by a large margin” so if the experts got it wrong with hindsight in 2008, how could Brian Cowen have ever got it right in 2007?

b. political – how would the political system deliver it in practice? I think it is a cop-out to offer a theoretical construction that does not exist to overcome the massive political resistance to a tighter fiscal policy that is all too obvious.

Chop the truth

“bank lending for development was still mental”

Hmmmm. Curious syntax and vocabulary …. It was not for development, it was for fees and interest rates and to re-elect a government. “Mental” may be accurate.

Sorry for picking on you, I am watching reruns of that pretentious snob, Frasier.

yoganmahew Says:
June 18th, 2010 at 11:14 am

As usual, very good. But the remedy is simple: do not believe in banking as a saviour. No amount of “regulation” will suffice when they are being paid to not regulate and are unaccountable. The whole edifice was built upon an illusion set out in the “Wizard of Oz” a political tract that was made into entertainment.

Banking needs to be nationalized. Growth will suffer in the short term, but the enormous disruptions due to credit magacycles is more than worth it. Hence the fear of the “Government” against nationalization. Thgere will be no cronyism then except with lots of evidence for prosecutions!

Unless you are really in favour of squeeze and release. It does favour those who are not stupid and who can be unemotional about money. Why not accept the crisis mentality as it only occurs every 70 years or so? It has advantages do you think?

Chop the Truth

“It seems harsh to blame Brian Cowen for not second guessing them when the financial community generally missed it too!”

Lying about loans as deposits and havinbg this co-ordinated by the government, in the form of the regulator is exactly Cowen’s offence! But there will be no oral testimony from those who reported to him and all documents will be missing!

You are a shill. “Minister Lenihan” suggests you are a public servant and a poor one at that!


I think I detect a note of exasperation. If this is the case, be assured it is shared by many. I have no wish, or intention, to be partonising, but even many of us born and reared in Ireland struggle to understand the Irish mindset. The late Nuala O’Faolain summed this up in a positive light:
“For myself, I like it that people persist in mingling the everyday and the otherworldly. It is an ancient and a universal practice. And although, on a public level, one would like Ireland to be run in a reasonable, pluralist, modern way, there is more to living here than being a citizen. There is a capaciousness not so much of belief as of endlessly suspended judgment, which to my mind is precious.”

But this mindset has its pernicious aspects. The popular willingness to suspend judgement endlessly is exploited by those who exercise power and influence. No judgement is accepted unless delivered by the people in a general election or by a court or judicial tribunal when all avenues of appeal have been exhausted. And these tactics can rely on fratricidal opposition urges when a popular vote is delayed or denied and on public revulsion at the time and expense incurred to secure a judicial judgement.

The cry for full “due process” goes up when there is any call for an investigation of the sequence of policy decisions over the last decade that made this, largely home-grown, economic and fiscal crisis almost inevitable. But there is almost a complete absence of demand for a “due process” in the policy decision-making arena to resolve these crises and to minimse the possibility of such a sequence of imbecilic and economcially illiterate policy decisions being made again.

I note that Governor Honohan has expressed doubts about the requirement for, and benefits of, a full scale inquiry. I suspect his doubts are motivated by a recognition that it would be used, in the time-hallowed manner, to delay and suspend judgement and that it would be far better to concentrate on developing the structures and processes to get out us out of this mess and to prevent a repetition.

If this is the case, I would be inclined to agree. The people have less than two years to wait until they will have an opportunity to pass judgement on the stewards of the economy. But they may not have to wait this long if the liberal-centrist, pragmatic cores of FF and FG find the courage to re-fashion the political landscape in the public interest and work to establish the structures and process required to pursue rational and sensible policies.

zhou_enlai Says:
June 19th, 2010 at 1:24 am

Apart from the nonsense that it was not predicted, agreed. Are you in fact a committee of posters from the one url? You seem to have a range of different opinions!

Paul Hunt Says:
June 18th, 2010 at 5:44 pm

Quite correct! But some did know. Who knew what is also known but is also not public knowledge. What they did is very close to treason. Given the costs involved, a capital offence is clearly indicated. Some will never rest easy because of their involvement in this.

@ Cormac

Thanks for those enlightening views and to Iulia and everyone for this very interesting thread

‘Bottom line: we made an intellectual error in underestimating the monetary stimulus from EMU in 1997-2007 and we are making an intellectual error in underestimating the monetary pressure EMU will put us under in 2008 – 2018. EMU will drive us from binge-eating to crash-dieting’

Wasn’t the main attraction of EMU that Irish banks would be able to access cheap credit, and so have the means to finance economic growth ? On the surface, that seems like a good thing, and it could have been. Our banks chose, sadly, to abuse that facility by joining with our developers in looting their own institutions. For detail on looting see

We accept that our government encouraged bum, ‘profitable’ lending through massive tax breaks, while the regulator stood idly by. The Central Bank was shamfeully emasculated in the process. That’s silent, unacknowledged loss of sovereignty.

Notwithstanding the Governor’s ‘absolute disinterest’ in personalities, and the black box that is NAMA, there will be no hope of restoring confidence in politics until the details of the scam are explored. There is no need for defenstrations, but the social consequences of this are just too serious, and ‘back to your desks boys and girls’ won’t work.

Alex Preda shows in “Framing Finance’ that speculation is as central as investment in complex economies. He theorises it as a modern form of ‘tribute extraction’. Lenders to banks are fully aware of the looting, but they regard it as a natural, but unacknowledged feature of the Money Game.

Bigger speculators lend to smaller ones. As lender to states as well as banks, Mr Market are in a position to enforce taxpayer support for insolvent banks, and so limit negative consequences for him/herself.

I daresay Mr Market is also in a position to exert a pretty strong censorship on ‘objective’ institutional reports, such as those produced by the ECB. Money talks. Why are we surprised that the EU ‘didn’t notice’ anything odd ? Mr Market was biding his/her time.

It follows that we can stay in or out of EMU, and suffer the various consequences of either choice, but we can’t get away from Mr Market.
That begs a question as to how Mr Market cam to have such power (for good and ill) in our lives. That’s too big a question for a fine summer’s day.

paul quigley Says:
June 19th, 2010 at 8:35 am

Welcome to what the Austrians call malinvestments! Distortions are not merely financial, but ultimately political and social. For this reason the Austrian school is quite limited in it’s philosophies: banking is toxic!

It turns truth on its head! Deflation is the norm in history for excellent reasons, despite massive growth in population and demand!

The corrupt decision making has to become conscious after a while because the demand stoked by loans in abundance naturally satisfies normal human needs. Hence we need abnormal needs! And boy, do we get em! The MSM are but the most obvious example to those with a brain. All values of the last three decades are suspect and money may be made in the value reversals setting in with depression.

Cormac Lucey Says:
June 19th, 2010 at 9:10 pm

Superlative! Well said!

But now we are in emu. The alternative will allow the idiots to again take charge. Why do you assume that prominent Irish members of the EC at political and professional levels, did not warn of what was going on? I suspect they did! The result is that the stupid in Ireland suffer more than the smart and Europe is stronger. The best way to teach a wayward dog a lesson is often to let him bite the electrical device. They will hardly ever do it again!

I repeat: I know the calibre of those who run Europe. Surely you do too? They knew. They warned. But privately. And they may even have profited! I had to laugh at McCreevy using Fingleton to beggar himself! Very appropriate justice! Clearly I do not refer to him!

michelle Norris

Have you heard of pick me ups? They are publicly funded contracts awarded to private enterprise. Then a back hander is paid to a political party and individuals. The Gardai investigated some ages ago. Cronyism? Yabetchya!

A great lil country!


Many thanks for your thoughtful remarks, they are indeed reassuring. I am aware that it takes time to change the mind-sets of policy makers. The fact that we are having a discussion about this is already progress and I am sure people will listen and will think that things could and should be done better.

@ Cormac Lucey

I believe that there was an intellectual failure by most economists to clearly see what was happening at the time. Good for you that you saw it. Shame on those who would move the goalposts rather than admit error.

Cormac, surely this is a case of the kettle calling the pot black arse?

You yourself avoid accepting responsibility for your own party, the PDs, being ignorant cheerleaders of tax cuts based on a property bubble and all the blame is shifted to the EMU.

You were on the backfoot from the start in 1997 when Ahern won the support of independents with the offer/bribe of a tax-free annual payment of €40,000 per person to so-called “independents” plus other tax-funded inducements.

By 2002, the Faustian Bargain was well sealed when you recruited the head of the IFA, a symbol of State socialism, who had won a bonanza for farmers a year before by making land purchases for roadbuilding almost one quarter of total costs – – double the EU average.

You well know that official reports such as from the IMF e.g statements on the value of the renminbi etc, are sanitised and agreed before final publication.
I’m in favour of plain speaking and yes the ESRI should have had the cojones to risk the ire of the establishment. It did fail.

There was of course a chorus of approval for the messiah Charlie McCreevy – – financial services journalists and the likes of Damian Kiberd had run out of superlatives — and for the spoilsmen looking for baubles on quangos and the like, there was no dissent.

The strong support of IBEC and surveys of business executives invariably supported the status quo but the FDI sector had stalled and 90% of Irish exports were being made by foreign-owned firms; Irish commercial property investment across Europe was surging as the total available annually for venture capital investment in Irish business at less than €200m compared with at least €10bn for overseas property investment.

As regards Rossa White’s estimation that an appropriate policy rate for Ireland would have been 6% at a time when EMU base rates were just 2%, Iceland’s rate at the time was over 8%.

With monetary policy run from Merrion Street, a rate of 6% would have prompted a huge inflow of hot money seeking carry trade yield, because the same poltroons would have been in charge of policy.

For the punt, such a rate would also have put upward pressure on the value of the currency while your PDs would have underpinned FF cronyism in their support of the construction industry. It is more likely that the rate would have matched the BoE’s and would have had little impact on the property bubble.

Why would Ireland have avoided being another Iceland – – mass property hysteria; amnesia that the same FF/PDs had wrecked the economy in the late 1970s — a budget deficit of 17½% of GDP in 1978 – – a record for developed countries in the period 1970-2008 according to the IMF – – and strong public support for the madness.

Irish Economy: The 2001 economic consensus that paved the road to economic ruin

I doubt if an FG/Labour coalition would have left the Irish people with the legacy of failure of the FF/PD governments with a devastating human toll and a payback that may well reverberate for two decades or more.

@Cormac Lucey,

your arguments:

“But my arguments against a fiscal policy balance to counterweight a monetary policy imbalance are:

a. technical – how would we measure it? The EU judged that Ireland ran a structural fiscal surplus in 2007 “by a large margin” so if the experts got it wrong with hindsight in 2008, how could Brian Cowen have ever got it right in 2007?

b. political – how would the political system deliver it in practice? I think it is a cop-out to offer a theoretical construction that does not exist to overcome the massive political resistance to a tighter fiscal policy that is all too obvious.”

My counter-arguments would be:
a: technical – not all experts got it wrong. Experts disagreed and a decision was made to follow some experts advise against the advise of other experts. A decision was made about what advise to listen to and coincidentally; that advise increased electability.

b: political – “The Republic” is very good at discrediting democracy as a political system. That being said, while it describes the mechanism on how democracy fails (populism) it does not absolve elected officials of blame.

While what happened in Ireland can be explained by the failure of democracy (as described by Plato/Socrates) it does not provide a solution. Should Ireland replace democracy, replace individuals or will the individuals who failed do better from now on and nothing needs to change?


Output growth differentials in the euro area are explained mainly by differences in supply conditions such as long-term demographic, labour supply and productivity developments. Monetary policy has little or no impact on these supply conditions. Cyclical components of growth rates of the euro area countries have become more synchronised since the adoption of the single currency. Details can be found in this paper:

The real interest rate is only one determinant of the demand for housing. I recall a research paper showing no significant effect of the real interest rate on the demand for housing in Germany. There is also little evidence to suggest that the euro is resposible for housing bubbles.

Interest rates are decided in Frankfurt taking into account the euro area aggregate. However, what matters for the decisions of investors and consumers are the real interest rates, more exactly long-term expected real interest rates which depend on long-term inflation expectations. As shown in the above paper, in Ireland over the period 1999-2005 domestic costs were the main reason for an inflation rate higher than the euro area average. A lack of competition in services, real wage increases above productivity growth and increased public spending contributed to inflationary pressures.

@Pat Donnelly – “Someone should consider a misery index for Ireland?”

Here you go:

🙁 🙁 🙁 🙁 🙁

I give it a 5-grimace rating at the moment.

@Cormac et al
Ok – lets say your 100% right and that joining the Euro was a disaster, and staying in a worse one. Now….how, in practical terms, do we get out? What steps, in what order? When for instance do our bank accounts get converted (devalued) into nua-punts? Do we do that to out bonds outstanding as well (in which case isnt that a default?)? when do the exchange controls come in ? Etc etc….
Practical steps to achieve the outcome. For what its worth, other prominent euro-leavers couldnt tell me, so I wonder if you can. Im being serious – im convincible if the practical aspects are workable out.

@Zhou & Cormac – all I can comment on is the research area that I work in and that is not banking. As early as 1999/2000 people were talking about a housing bubble. It was also abundantly clear that the government was stoking the fire in construction, which resulted in high inflation not just in housing but all construction projects – a point that was not accepted at the time despite firm evidence.

The warnings about the housing bubble and related issues should have been made more forcefully. If some, even relatively modest, steps had been taken in the period 2003-2006 then we would not be in as bad a mess as we are now (spilled milk). At the time the warnings were drowned out by the comments of certain commentators who clearly had a vested interest, but who’s message suited at the time. Nobody wants to hear that the party is over and that applied not just to the government but other parties, large sections of the media and the general public. The lesson that we must learn from this is that we should question the status quo more rigorously and have more informed debate rather than the sort of anti-intellectual dumming down that has been evident over the last decade. Researchers must play their part in this by bringing their skills to real policy analysis – this blog makes a contribution to this.


I think that is fair comment. It is human nature to hear what you want to hear. Politics is about dealing with set-backs as you are able. It was politically more achievable to deal with a manageable slow-down when it came. I suspect that until Morgan Kelly and George Lee outlined armageddon the majority of TDs in the Dail had not bothered to ponder what all the warnings meant. Other sectors of scoiety fell into the same way of thinking that we had now made money and had a cushion that would last us through various difficulties.

@Cormac Lucey

Thanks for those posts.

@Pat Donnelly

Keep it coming old-timer!

BTW – Colm McCarthy on Marianne Finucane pointed out that there were warnings in all areas though none predicted the severity of the situation.

One wonders did the problem of siloization play a large part in senior people not noticing a pattern of warnings being ignored in various important areas? Do these senior people exist? Perhaps we need another independent body to monitor and report on the culture in the civil service on an ongoing basis!

The announcement that the Government is willing to support the establishment of a Fiscal Council is a welcome development. It will be interesting to see how will the Government act when the views of the Irish Fiscal Council will differ from the views of the Commission (I would be surprised if they would not differ sometimes!).

Another independent body!? What on earth is parliament for? The body that represents all of the people who, utlimately, hire and pay all civil servants.

@Paul Hunt

Philip Lane’s version of the Fiscal Coucil would assist Parliament by providing information and analysis to the opposition in advance of the budget debate. It would break the DoF’s monopoly on the flow of information to parliamentarians.


As far as I see it, the role of this Fiscal Council will be to analyse and monitor the fiscal stance in Ireland with the objective to inform the public and advise the Government on fiscal policy. In my view, it should include independent academic experts with internationally acknowledged relevant expertise. Information about the Swedish Fiscal Council (aim, members, Reports, Presentations etc) can be found here:

@Zhou (and Julia),

Apologies. I was not condemning a fiscal council out of hand. I was merely responding to the (perhaps, tongue-in-cheek) suggestion of a body to monitor CS culture.

I have my doubts about the ability and willingness (as recounted on the thread initiated by Philip Lane) of current governance to put an effective fiscal council in place, but the effort should be made. Indeed, I would go so far as to propose that not only should the economics capability of the DoF be stengthened, but that much of it should be duplicated in support of Dail Committees. The cost would be negligible if it got us out of this mess more rapidly and prevented (or, at least, mitigated) any repetition of the current debacle.

Does anybody remember when Wim Duisenberg came to visit Charlie McCreevy ?
Irish ministers have defied calls by the European Commission for action to rein in the country’s “overheating” economy.

Ireland’s prime-minister, Bertie Ahern, on Friday rejected a plea from the EC to cut IR£400m (£322.5m) from the government’s expenditure plans.


Wim Duisenberg, president of the European Central Bank, is among heavyweight observers who have warned Ireland against overstimulating its economy.

“The budget plans of the Irish government were clearly out of line with the broad guidelines they had agreed to earlier,” he said on Thursday.

“So I do have full understanding for the [EC] judgment that has been reached.”


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