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.”

….

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.

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:
http://www.finanspolitiskaradet.se/english/swedishfiscalpolicycouncil/abouttheswedishfpc.4.6f04e222115f0dd09ea8000950.html

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.

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!

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!

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.

Here you go:

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

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: http://www.suerf.org/download/studies/study20083.pdf

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.

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?

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.

Possibly useless but may keep the autistic occupied. The real problem is that no reputable sources of stats now exist? Too much spin and malinvestment in lies etc.

Someone should consider a misery index for Ireland?

Creating poverty is a road to ruin: discuss!

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.

This is an example of what is obvious: damage to individuals and communities that will not be addressed until later. Just like asking Firemen and women to breathe in asbestos from the twin towers!

Malinvestments! The lack of banking may be the saving of mankind!

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!

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!

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.

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 http://www.nakedcapitalism.com

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.

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.

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!

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.

“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!

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?