Hidden Message from the Banking Inquiry: A First-Rate Economist Should Head the Central Bank

“The coalition partners might mistakenly think … that they can return to the cosy past of a pliable ex-civil servant running the central bank.”

I have no doubt that a desire to return to this cosy past exists, but the extent to which there is some reasonably coherent EU institutional supervision should be sufficient to frustrate this desire. But I have considerable doubts about the ability of a “competent economist at the helm of the central bank” to stop the rot during the long run up to 2008. Successive governments most certainly didn’t want the reality of bank supervision and financial regulation; they wanted optical illusions – and that’s what they got. That’s why I find the pillorying of the former financial regulator and former governors of the central bank so distasteful. If they had made any effort to apply effective bank supervision and financial regulation they would have been shunted aside very rapidly. And there was no shortage of equally pliable replacements queueing up behind them.

It’s perfectly reasonable for an economist to make the case that an economist should be put in charge of bank supervision and financial regulation, but these are not the only areas that might require such expertise. The economic regulation of all other non-financial sectors continues to exhibit precisely the same malaise that previously infected bank supervision and financial regulation. This should not be a surprise to anyone. The same governments that ensured the enactment of legislation that projected the optical illusions of bank supervision and financial regulation also ensured the enactment of the legislation that projects the optical illusion of economic in the non-financial sectors.

But it is proving increasingly difficult for this Government to sustain the projection of these optical illusions. It is becoming increasingly clear that the economic regulatory bodies, particularly in those sectors where there is considerable public ownership of regulated firms, are simply policy-implementing agencies. For example, the CER was established to implement the explicit and implicit polices of successive governments and to facilitate the ambitions and antics of the semi-state companies in the electricity and gas sectors, while insulating government politicians from the repercussions of unpalatable policy decisions. It performed this role exceptionally well – at the expense of the vast majority of electricity and gas consumers – until there was a comprehensive public rejection of the water charge regime it allegedly had decided on independently of government last autumn. The Government’s panicked about-turn has deprived the CER of any shred of credibility it retained, but every effort is being made to continue to project the optical illusion of independent economic regulation. Another example is aviation regulation, where the repercussions of the relevant minister’s antics last year have forced him to commission a comprehensive review of regulation in this area.

But nothing will change while perverse variations of the failed British model of economic regulation continue to be applied.

Re: Appalling deficit in analysis by our own Irish academia

Gregory writes,

The coalition partners might mistakenly think that all the hard work has been completed under Honohan and that they can return to the cosy past of a pliable ex-civil servant running the central bank.

In reporting in Irish newspapers this weekend, this was very much the conclusion arrived at. In commentary and in criticism, we have returned to the same comfort zone, that we lived in, pre- the crisis of the later 2000’s. Until quite recently in Ireland, we were un-educated and under-educated for the most part. But in recent decades, we have seen large swatches of the middle and working class population in Ireland advance to third and fourth level education. We have witnessed the establishment of all kinds of new centers for learning and scholarship, around the country. This roll out of advanced education, and the building of some kind of ‘new age’ economy around the same, has been impressive. It is the kind of thing, which only a young nation, a nation willing to be the architect of it’s own destiny might do.

We could also ask ourselves the question, are there any downsides to this?

There are downsides, and severe ones. What has replaced ignorance, innocence and lack of awareness is sometimes an extreme level of bravado and sometimes denial. It comes with our new-found status, in terms of academic achievement. That achievement which seems to put Ireland, on the same level as other countries around the globe. But there is now a resident population on the island of Ireland, of well educated and bright people, who all still have a heck of a lot of ‘growing up’ to do.

My contention would be, that the Irish central bank, and the Irish financial regulator’s office were examples of institutions in Ireland, which worked in exactly the manner in which they were intended to function. As Fintan O’Toole puts it recently, the job was to defer to the banks.

That explanation is not good for our current crop of bulging brained economics professors though – who want their lives to mean something more. They want their country to aspire to the same heights as they do. The academic community in Ireland, as part of it’s bravado, want to invent institutions and standards, and levels of compliance with global excellence, in their imaginations only.

When push comes to shove, the community of Irish academics will sit comfortably in their ivory towers, and imagination a reality for Ireland that is up to their standards, rather than going out there and building it for real. There is evidence of this provided all across the range of newspapers, and broadcast channels in Ireland over this weekend.

None of the academic commentaries that I have read since last Thursday, even dare to reduce themselves down to the levels of quoting from legislation, that underpinned the function of the Irish financial regulator, in the first place. It appears as though, Irish academics are unable to bring themselves down to the grotty levels of reading through legislative code.

But that is exactly, what our regulatory system was build upon, in reality.

After the collapse of the ‘dot com’ bubble in America, a lot of business schools there were appalled – because of their own contributions to what had happened. Instead of being in denial about that, the schools in America got stuck in, and they examined themselves. That is not what has happened here in Ireland, post- our own financial crisis. Indeed, very much the opposite. Irish academic institutions have washed their hands, and that only smacks of their lack of evolution and recent-ness of their arrival.

In the early 2000’s American universities were pretty much appalled by the realization, of the sheer numbers of graduates, their brightest and best, who played pivotal roles, in driving the America, and it’s stock markets over a cliff. As if that wasn’t bad enough, the exact same people, before that decade had even ended, repeated the same thing again.

Be one hundred percent clear, the community who engineered both of the major financial crises in America, in the last decade were the brightest and the best of their generation.

Gregory writes,

This hands-off management style, where the leader does not provide analytical input or make difficult decisions based on measurable data, but just chairs meetings and looks for a consensus, works fine in some institutional environments, but not for a central bank head.

This goes to the heart of the problem. When they excavated through the rubble of the ‘dot com’ bubble collapse in America, time after time they found leadership, and graduates who had followed the ‘rule book’ they had been given in education. A whole century’s worth of scientific management theory, had led to the point where the American economy was at, by dawn of the new 21st century.

Starting with Ford and Taylor, and continuing through the 20th century, the business schools had worked to improve tools and teachings they could offer to their management graduates. The problem, that it boiled down to, was that management science had swung too far in one direction. Everything was about ‘decision making’, choosing between options as they were presented on the table.

Nowhere at all, in the academic training, had suggested to not accept what options were ‘on the table’, and the action to reject pre-packaged options, might be needed. That is, the best option might be the one, which still needed to be discovered. In the conversation in Ireland, our own financial crisis is described very much through the framework of classic management theory. It all came down to a ‘decision’ ‘A’ and ‘B’, on some night in September 2008.

It is the zenith in the expression of what 20th century scientific management is about. We have embraced education in Ireland. We have embraced both the good sides of it, and the bad.

To do what Patrick Honohan suggested, may have been needed in late September 2008, would have required a leader to say, these options are all lousy, and I’m not satisfied that the best option, is even on the table, at that point in time. To do so, would require a leader to turn against everything that has been taught in business and management schools for a century.

We have to ask ourselves, was that really going to happen?

The emphasis on ‘decision making’, it was discovered in America, was responsible in large measure for a long series of failures, which led in the end to the collapse of their economy, on not one but two occasions, and within the same decade. One really has to ask the question therefore, how much differently was a small island that models itself as being the ’51st state’, going to behave?

Irish academics might not like this conclusion, but it is the cold mirror of their own reality, that they must gaze into. BOH.

I word argue that putting a system in place to facilitate easy access to pertinent data/information is more a basic managerial skill rather than an expert economist skill.

I hope in the future we look back at the incompetence of that generation of leaders and think ‘How could that happen…’

It is wishful thinking that a top class economist of better financial data would have stopped or mitigated the rot in the financial system here. You only have o look at your country of origin for that Gregory. Unless you don’t count Ben Bernanke as a top class economist. Subprime contained?

The article makes some very good points. The last thing (among other last things) that the country needs is the return of the Central Bank to a careerist public servant, with no detailed knowledge of central banking.
It would be a bit like putting an accountant in charge of the heart surgery unit; but perhaps we do that too.
Consensus building seems to be the great achievement of the careerist PS, generally building a consensus to do nothing. That always works well initially.

@JTO

Listening to IBEC (or was it SFA) this morning saying that 40% of SMEs cannnot afford wage increases, I begin to wonder if we are experiencing cashless growth. I have heard of jobless growth, but cashless growth is new to me. On behalf of the hard pressed workers of Ireland, you should sent your forecast to IBEC / SFA. The growth money has to be going some place, after all.

@ JR: “… I begin to wonder if we are experiencing cashless growth.”

I believe there is an infinite supply of ‘virtual money’ available (fiat, electronic stuff). But it has first to metamorphose into real money and then be grafted onto productive enterprises – that is, making physical stuff for sale to real demanders with real money.

The problem is with those elusive demanders. If they have any spare real money, it might be used to pay down their debts – hence the real money is annihilated when it collides with real debt (anti-money). So, maybe you are correct. Faux, Enronesque economic growth parallels the destruction of real money. Neat!

Now all the econs have to explain to us is how does virtual money becomes real money. Word made flesh – and all that?

The need for regulation arises generally in circumstances where a goods or services provider enjoys some form of monopoly, whether natural or constructed by the state. Remove the monopoly by the introduction of some form of market mechanism (aka putting the “customer” in the driving seat), and the need for regulation either diminishes or disappears entirely.

http://www.per.gov.ie/statement-by-the-minister-for-public-expenditure-and-reform-brendan-howlin-t-d-on-the-outcome-of-discussions-between-the-government-and-the-public-service-unions/

In the actual agreement, paragraph 3.3.5 concludes as follows;

“The processes set out in paragraph 6 of the “Service Delivery Options” document must be undertaken prior to any outsourcing of an existing service taking place, and in the evaluation process referred to in that paragraph, any cost comparisons shall exclude the totality of labour costs.”

In short, no basis for a valid comparison is to be allowed.

Against such a background, it is near farcical to speak of “reform” in any meaningful sense. The public sector is to remain like a fixed star in the firmament, accretions being allowed but not any serious questioning about whether many activities should be undertaken by the state in the first instance.

Stasis, Irish style!

The only saving grace is that the sums of money involved are necessarily limited and standing still is, in the long run, not a tenable position; for any of the parties.

@Brian Woods Snr.

Methinks we need the generalist human equivalent of Benjy – now outed as a crafty pragmatist bi-sexual bull – to head up institutions such as the Central Bank.

@Gregory Connor

With due respect to The Guv’nor – more erudite and well rounded than most so-called first-rate economists – the last person I would trust with such a position would be a so-called first rate economist.

IMHO, most are under-educated, seriously ontologically challenged, and more often than not, simply plain wrong.

@DOCM

Delighted you linked to the Tsipras Le Monde article.

Excellent article from my viewpoint. No wonder the Eurozone and IMF and ECB rushed to Berlin to consult. You have to take your instructions from the top, I suppose.
The article from Marc Campion is about what one would expect from a champion (no pun intended) of finance.

June 10th is the day to watch.

@DOCM,
Your description of economic regulation harks back to a time when it did what it said on the tin. In its ‘Hope Decision’ of 1944, the US Supreme Court established some abiding principles of economic regulation. It established, firstly, that the setting of regulated tariffs or prices “involves a balancing of the investor and the consumer interests”; secondly, that “the investor interest has a legitimate concern with the financial integrity of the company whose rates [i.e. tariffs or prices] are being regulated. From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock”; and, thirdly, that “the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital”.

The application of the British model of economic regulation fails to comply with these principles. And what is even worse is that, instead of enforcing these principles, the policy implementation role of so-called economic regulators has expanded enormously. For example, the EU’s recent electricity and gas directives (2009/72/EC and 2009/73/EC) impose 21 duties on energy regulators. The delegation of these powers and duties suits governing politicians perfectly since they will do everything to evade scrutiny, restraint and accountability. Regulators, of course, do look after the interests of final consumers – or not. Ofgem, the UK energy regulator, makes much of its investigation and enforcement activities that penalise licensed regulated firms for damaging the interests of final consumers. Evidence of this activity may be found here:
https://www.ofgem.gov.uk/investigations/investigations-and-enforcement-data

The fines are no deterrent since they comprise a tiny fraction of the cash flows of these firms. They simply treat them as a cost of doing business. It’s similar to the fines that the US and UK authorities impose on banks for criminal activity. It begs the question: how much wrong do you have to do before your licence to operate is revoked?

It is interesting to note that none of the licensed, regulated firms in the Irish electricity and gas markets have done anything to damage the interest of consumers that has provoked investigation and the subsequent imposition of fines by the CER. It doesn’t have the powers, resources or incentives to do so. Revoking a licence is the ‘nuclear option’. But then of course the firms operating in these sectors in Ireland wouldn’t do anything like that. The island of saints and scholars.

@DOCM,

Pbate?

I understand what you’re getting at, but, in the context of this thread, I’d prefer to stay with regulatory bodies being established, with delegated powers being granted to them. But instead of functioning as regulators within the broad legislative and policy context – and striking a balance between the interests of consumers and investors (and curtailing the greed of other special interest groups involved) independently of the political process, both explicit and implicit policy-implementation duties have been imposed on them. The implicit aspect requires pandering to favoured special interest groups at the expense of the vast majority of citizens as final consumers or service users. And these powers and duties are delegated and exercised with minimal scrutiny, restraint or accountability – so that governing politicians can evade this scrutiny, restraint and accountability. This is one of the main reasons why banking supervision and financial regulation failed so abysmally in the long-run up to the blow-outs in 2008 – and why economic regulation continues to fail in all other sectors where it is applied.

It was only in extremis that the governing politicians recognised that Prof. Honohan had a role to play. He’s long enough in the tooth and wise enough to recognise that, as business as usual gradually returns, his skills and abilities are no longer welcome. And that, I suspect, contributed to his decision to bow out early. People who know what is the right thing to do and who have the capability and determination to do it are welcome only when enough of the brown stuff hits the rotating blades that governing politicians recognise that the usual pliable public servant won’t do. But the latter is fine in all other circumstances – and the former most certainly is not. (And there’s no point talking about long-standing practices in northern European and Scandinavian countries. Despite a history of much intolerance, puritanism, narrow-mindedness and bigotry, some good civil society traits and attributes have emerged and proved durable and useful from the long tradition of protestantism/Lutheranism. These traits and attributes never secured sufficient traction in Ireland and mainifest themselves largely in terms of the hypocritical lip-service paid to them.)

So I would turn the title of the post upside down: the secret message is that a competent, non-malleable, non special interest group pandering person is no longer required.

@ PH

Apologies! Some gremlin in the works caused the above.

To continue.

“foreign devils” i.e. outside consultants, but have the in-house expertise to do the work themselves. They can only have this if the hermetical seal between public and private sectors ceases to exist.

One promising development is the fact that the glaring inconsistencies in the most recent agreement – clearly an electoral ploy and nothing else – are emerging in the public eye; courtesy of those who have failed to face up to the radical steps that are required.

@DOCM

What are “the radical steps” that are “required” (by whom?) and to what end?

A first rate economist? – at least an understanding of macroeconomics and the distortions that mean Irish headline data should not be taken at face value.

As the Central Bank is a large organisation with key regulatory functions, prior experience in a similar organisation would be important — how would a chief otherwise anticipate problems that could arise — the risk that fraud is not detected early and so on — without having a track record in the area?

A track record of independence, questioning conventional wisdom and confidence in communications both internally and externally — Neary must have had very poor relations with his staff: he only became aware of the Irish Nationwide end of year loans to FitzPatrick 10 months after his staff had discovered them.

Neary disclosed in the Anglo court case last year that he did not ask Seán Quinn about the size of his stake in Anglo Irish Bank when the two men met in early 2008 because he didn’t think it was “fair or appropriate” to “tackle” the tycoon on his investments.

@ Ernie

This might be a good place to start in terms of the radical steps required i.e. going to the electorate with a proposal, like that of some Portuguese parties, to put a debt brake into the constitution on the German model.

http://www.dn.pt/politica/interior.aspx?content_id=4605373

Of course, this would hardly occur us!

http://www.irishtimes.com/business/economy/who-owes-more-money-the-irish-or-the-greeks-1.2236034

It should!

Bad news for Ireland’s poverty industry. It appears that both the number of persons living below the ‘poverty line’ AND the number of persons living in ‘jobless households’ have been significantly overestimated by the CSO.

http://www.irishtimes.com/news/social-affairs/official-data-may-overstate-numbers-living-in-poverty-1.2236447

The Irish Times report on Debt is not just incomplete, it’s completely out of paradigm. At this stage it is only the ideologues who pretend that their is no difference in the debt sustainability of a currency issuing, free floating, sovereign and a currency user/pegged sovereign. The first is limited only by inflation not some peculiar measure such as debt/gdp.

fyi

Looks like The Guv’nor has been reading Hegel again!

http://www.independent.ie/business/irish/exclusive-honohan-admits-im-an-ideas-man-not-an-implementation-man-31279569.html

@ DOCM: “One of the positive aspects of our colonial inheritance is a public service of near total integrity.”

DOCM, we (Ireland) were never a colony. We either had our own government (up to 1801), or we sent over 100 MPs to Westminster – in fact Ireland was ‘over-represented’ in the number of its elected MPs. The Irish Parliamentary Party were a bunch of patsies? Think again!

The ‘colonial’ whinge is deployed by persons who have a distorted and inaccurate political or legal understanding of what a real British colony was. At this late stage, using the term is simply a form of mindless propaganda. Or Psychic Balm if you prefer. Neutralizes brain function. Prevents a valid analysis.

Actually, I blame it all on Hurricane Charlie!

Gold is real money. Silver is real money. Bitcoin is fiat but has the saving grace of being strictly limited in quantity. The combination of these is where our monetary system is headed. All Austrians know this. All Keynesians deny this.

The other obvious implication many have alluded to is that the “economic system” is far too complicated to be managed by anyone. No academic or group of same, no institute or think tank can ever arrive at a model of the economy that considers the innumerable variables, each one of us being one of the six plus billion of same. The truth is that the market itself much like a vast shoal of fish or an enormous herd reacts independently. There is a “mind” separate from the individual that determines the outcomes which impact on our lives. This is the market.

Outside the marketplace there be devils. Manipulation, fascism, greed, theft, violence, arrogance etc. all the vices and evils that have finally brought us to the cusp of disaster are on display everywhere.

Humans need to respect each others property. Only then will ones own life be safeguarded. Government need only uphold property rights and everything else will fix itself. After this we get into the area that conflicts so violently with the present societal norm. Where academics become so distraught. This is of course,