Andrew Crockett Memorial Lecture by Raghu Rajan


5 replies on “Andrew Crockett Memorial Lecture by Raghu Rajan”

nobody commenting so far today, everyone busy/gobsmacked (though shouldn’t be) reading about the Anglo-Irish bank phonecall

“Inside Anglo: the secret recordings
Tapes reveal the lies and deception that led to the bank bailout”

TAPE RECORDINGS from inside doomed Anglo Irish Bank reveal for the first time how the bank’s top executives lied to the Government about the true extent of losses at the institution.
The astonishing tapes show senior manager John Bowe, who had been involved in negotiations with the Central Bank, laughing and joking as he tells another senior manager, Peter Fitzgerald, how Anglo was luring the State into giving it billions of euro.

Mr Fitzgerald had not been involved in the negotiations with the Central Bank and has confirmed he was unaware of any strategy or intention to mislead the authorities. Mr Bowe, in a statement last night, categorically denied that he had misled the Central Bank.

The audio recordings are from the bank’s own internal telephone system and date from the heart of the financial crisis that brought the State to its knees in September 2008.

Anglo itself was within days of complete meltdown – and in the years ahead would eat up €30bn of taxpayer money. Mr Bowe speaks about how the State had been asked for €7bn to bail out Anglo – but Anglo’s negotiators knew all along this was not enough to save the bank.

The plan was that once the State began the flow of money, it would be unable to stop.

Mr Bowe is asked by Mr Fitzgerald how they had come up with the figure of €7bn. He laughs as he is taped saying: “Just, as Drummer (then-CEO David Drumm) would say, ‘picked it out of my arse’.”

He also says: “If they (Central Bank) saw the enormity of it up front, they might decide they have a choice. You know what I mean?

“They might say the cost to the taxpayer is too high . . . if it doesn’t look too big at the outset . . . if it looks big, big enough to be important, but not too big that it kind of spoils everything, then, then I think you have a chance. So I think it can creep up.”

Mr Fitzgerald, the Director of Retail Banking, is heard saying: “Yeah. They’ve got skin in the game and that is the key.”

Mr Bowe’s comments in the audio recording reveal that Anglo’s strategy was to lure the State in, leaving taxpayers with no choice but to continue to provide loans to “support their money”.

The recording also shows Mr Bowe and Mr Fitzgerald laughing as they say how there is no realistic chance of ever repaying the loans.

For the first time, taxpayers get an exclusive insight into the banking shenanigans that cost Ireland our sovereignty.

This is a really impressive contribution!

The current state of the economic policy debate seems best summed up in the following extract;

“Similarly, one could argue that even healthy firms do not invest in the bust, not because they face a high cost of capital, but because there is uncertainty about where, when, and how, demand will reappear. In sum, the bust that follows years of a debt-fueled boom leaves behind an economy that supplies too much of the wrong kind of good relative to the changed demand. Unlike a normal cyclical recession, in which demand falls across the board and recovery requires merely rehiring laid-off workers to resume their old jobs, economic recovery following a lending bust typically requires workers to move across industries and to new locations because the old debt-fueled demand varied both across sectors and geographically, and cannot be revived quickly. 10

There is thus a subtle but important difference between the debt-driven demand view and the Keynesian explanation that deleveraging (saving by chastened borrowers) or debt overhang (the inability of debt-laden borrowers to spend) is responsible for slow post-crisis growth. Both views accept that the central source of weak aggregate demand is the disappearance of demand from former borrowers. But they differ on solutions.

The Keynesian wants to boost demand generally. He believes that all demand is equal. But if we believe that debt-driven demand is different, the demand stimulated by ultra-low interest rates will at best be a palliative. There is both a humanitarian as well as economic case for writing down the debt of borrowers when they have little hope of paying it back. 11 Writing down former borrowers’ debt may even be effective in producing the old pattern of demand. But relying on the formerly indebted to borrow and spend so that the economy re-emerges is irresponsible. And new borrowers may want to spend on different things, so fueling a new credit boom may be an ineffective (and unsustainable) way to get full employment back. 12

If the differentiated demand that emerged in the boom is hard or irresponsible to recreate, the sustainable solution is to allow the supply side to adjust to more normal and sustainable sources of demand. Some of that adjustment is a matter of time as individuals adjust to changed circumstances. And some requires relative price adjustments and structural reforms that will generate sustainable growth – for example, allowing wages to adjust and creating ways for bankers, construction workers, and autoworkers to retrain for faster-growing industries. But relative price adjustments and structural reforms take time to produce results.

The five years since the crisis have indeed resulted in significant adjustment, which is why a number of countries appear to be recovering. How much of this recovery owes to the varieties of stimulus, we will debate for a long time to come. Much as quacks claim the self-healing powers of the body to common cold for their miracle cures, I have no doubt that some economists will claim the recovery for their favorite brand of stimulus.

What is true is that we have had plenty of stimulus. The political compulsions that abetted the boom also mandated urgency in the bust. Industrial countries that relied on borrowing to speed up growth typically wanted faster results. With the room for fiscal stimulus limited, monetary policy became the tool of choice to restore growth. And the Keynesian argument – that the equilibrium or neutral real interest rate is ultra-low – has become the justification for more and more innovation.”

Two more extracts which deal with the reasons why the crisis arose and why Germany has managed by a mixture of good luck and good management to emerge better placed than any other major industrial power.

In it he [Andrew Crockett] argued

“the combination of a liberalised financial system and a fiat standard with monetary rules based exclusively in terms of inflation is not sufficient to secure financial stability. This is not to deny that inflation is often a source of financial instability. It certainly is… …Yet the converse is not necessarily true. There are numerous examples of periods in which the restoration of price stability has provided fertile ground for excessive optimism. …”

He went on

“If an absence of inflation is not, by itself, sufficient to ensure financial stability…to what can we look to contain their build-up? The answer is, of course, prudential regulation. However, the tools of prudential regulation are themselves based on perceptions of risk which are not independent of the credit and asset price cycle. If prudential regulation depends on assessments of collateral, capital adequacy and so on, and if the valuation of assets is distorted, the bulwark against the build-up of financial imbalances will be weakened.”

The contrasting fortunes of Germany and Spain.

“Of course, it did not seem at that time that countries like Spain, with its low public debt and deficits, were overspending. But as Andrew Crockett foresaw, the boom masks lending problems. Spanish government revenues were high on the back of the added activity and the additional taxes, and so spending seemed moderate. However, if spending was adjusted for the stage of the cycle, it was excessive.

The important exception to this pattern was Germany, which was accustomed to low borrowing costs even before it entered the Eurozone. Germany had to contend with historically high unemployment, stemming from reunification with a sick East Germany. In the euro’s initial years, Germany had no option but to reduce worker protections, limit wage increases, and reduce pensions as it tried to increase employment. Germany’s labor costs fell relative to the rest of the Eurozone, and its exports and GDP growth exploded. Germany’s exports, at least in part, were taken up by the spending Euro-periphery.”

@ Peadar
This is a public sector bashing site Peadar. The likes of DOCM and Michael Hennigan won’t hear a bad word said about bankers.
The only shocking thing here is that Eamonn Gilmore is shocked – in government for years and still doesn’t realise how the banks screwed us then and still screw us now. To be screwed and not realise it – that man must be on rohypnol

I would subscribe to the theory that the Banks, Public Service and Gov’t were all under the influence of mind altering substances. I would go one step further and add all the major foreign banks that enabled the lunatic behaviour.

There may be some exceptions such as Savings Coops’, a few dozen Public Servants and Bank Employees plus a few TDs’ and of course the foreign banks that refused to join the lemmings in their rush off the cliff.

What is needed now is Gardai led criminal investigations, charges, trials. The last thing we need are politician led circuses called inquiries or even worse proven time and money wasters called tribunals.

We are the laughing stock of the world, we do not have to be written off as a sick travesty of a country.
The laws are in place, enforce them.

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