Author: Colm McCarthy

Why have an inquiry?

1. The fiscal cost of the banking collapse is likely to be so substantial as to dwarf any similar event that has occurred since the foundation of the State. This is not e-voting machines, or the cost over-run on Luas, not that these were undeserving of investigation.

2. There has been a systemic collapse of the Irish banks – all of them. This is not a cock-up comparable to the DIRT/offshore accounts episode, or Mr. Rusnak, nor is it a failure of a rogue bank, or of small banks. 

3. The absence of a public explanation from the authorities or from the banks themselves has fed public perceptions that fiscal austerity is being pursued in order to bail out the banks. There would be fiscal austerity right now even if the banks were tickety-boo, but the absence of a factual public narrative on the banking collapse is damaging the credibility of the fiscal adjustment programme. Most economists regard this programme as necessary and desirable, at least in broad terms. It will take another three or four years, and it needs public acceptance.

4. Bank boards and bankers remain in situ with limited exceptions. The lack of contrition, given what has happened, fuels public anger and could damage the willingness to honour debts.

5. International capital markets have drawn their own conclusions about the extent of the fiscal cost, about the credibility of Irish regulatory authorities and about the probity of Irish business. The absence of a full narrative runs the risk of less favourable assessments than are actually warranted.  

Inquire into What?

6. Inquiries are under way, mainly concerning Anglo, into doctoring of accounts, loans to directors, share-support operations and other matters which may lead to criminal prosecutions. But several banks, including the two largest, appear to have lost most or all of their capital through mismanagement, without benefit of any criminal behaviour. An inquiry into boards and management is justified for the simple reason that these are banks, and have had to be rescued at taxpayer expense. The behaviour of auditors, and the efficacy of accounting standards, should also get a mention. A true and fair view would be that the Irish banks have made no profits at all for many years. 

7. There have also been major failures of regulation and supervision. How did a building society , for example, end up with a loan book 80% of which is headed for NAMA? Balance-sheet expansion, loan concentration and excessive exposure to funding risk on the liability side were permitted to proceed unchecked year after year.

8. Any inquiry should focus on these (non-criminal) issues – bank management, the performance of the regulatory authorities, auditors. The criminal investigations will take care of themselves.

9. Regulatory and supervisory functions are delegated to the Central Bank and its offshoots. The DoF and former Finance Ministers ought not to be in the firing line, on the principle that if you hire a dog, you don’t have to bark yourself. The media, and the Dail opposition parties, sometimes muddy the waters by seeking to pin the tail to the wrong donkey. So far as I am aware, the CB had adequate powers at all times, and never sought additional powers only to be refused.

How to Organise an Inquiry?

10. As a result of the Abbeylara episode, there may need to be special legislation to facilitate a parliamentary inquiry. There would be no public support for a ten-year extravaganza overseen by m’learned friends. Deputy Pat Rabbitte has apparently prepared a bill to deal with the Abbeylara fall-out, and Judge Yvonne Murphy appears to have done a competent job, quickly and at low cost, on the Dublin Archdiocese.

In its QEC released today, the ESRI notes that the fall in the CPI has been driven in part by declining mortgage interest costs, from which those in the lowest income deciles benefit little, since they typically do not have mortgages (pg 39).

ESRI goes on to recommend (pg 43) that there should be no nominal cut in social welfare rates of payment. On RTE’s Morning Ireland, ESRI’s Alan Barrett reiterated this recommendation, adding that the Special Group’s suggestion of a 5% cut relied on the CPI fall, 6.5% in the year to September, and that this fall was driven substantially by mortgage cost reductions.

In its report, the Special Group based its recommendations regarding Social Welfare rates of payment solely on the HICP, which is down 3% in the year to September, precisely because it was aware of the mortgage cost issue. We did not rely on the larger fall in the CPI, whose shortcomings in this regard I pointed out in a QEC article (editor: Alan Barrett) as far back as September 2007.

The Special Group wrote

Rates of payment in the Social Welfare system were increased across the board by approximately 3% in the budget of October 2008. Since that time, the Consumer Price Index (CPI) has fallen by 5.3% (up to May 2009), while the HICP measure of inflation has fallen by 1.6%. The principal difference between the two is mortgage interest on owner-occupied housing, which up to May 09 had been falling quickly in line with ECB interest rates decreases. It is known from the Household Budget Survey that this item is a minor component in living expenses for those income groups most reliant on social transfers, for whom the HICP, which has declined less than the CPI, is more relevant. Nonetheless, and relying only on the HICP, the real value of weekly and monthly Social Welfare payment rates would have risen in real terms since October even if no increase had been granted in the budget. (pg 186, Vol 2).

The intention behind the Group’s recommendation was to bring the real value of rates of payment back to their level of about Summer 2008, in part on the basis that the 3 to 3.3% increase implemented in January 2009 was based on expectations of continuing consumer price inflation which have not materialised. It was emphatically not based on ignoring the effects on redistribution of complexities in the construction and application of price index numbers. Developments in prices since the report was released in July have not altered the situation – prices have fallen a little further.

If someone can show that HICP, with weights from the lowest one or two deciles, is down less than 2% since Summer 2008, they have a case against the Special Group. Otherwise they are arguing for the maintenance of a real increase in rates. This is a legitimate political position, of course.

The presumption that Irish housing demand is somehow underpinned by favourable demographics has always been suspect, but recent data are unambiguousdly negative. The headline pop estimate for April shows population growth at 37,300 on the year. But the QNHS, also published this morning, gives figs for the 15+ population which show that growth ceased last Summer. The last five obs on seasonally adjusted 15+ pop are: Q2 08 – 3520.5; Q3 08 – 3529.5; Q4 08 – 3530.0; Q1 09 – 3529.9; Q2 09 – 3529.5.

Thus the growth over the year in the adult population all took place in the first quarter, and was in any event less than a quarter of the growth in total pop. Children don’t buy houses. The figs imply substantial out-migration of adults, at the rate of about 7 to 8000 per quarter recently.

Today’s release also gives pop estimates for April by age-group. The age groups up to 14 show healthy increases. But the groups 15-19, 20-24 and 25-29 are all falling. The 20-24 group fell, between April 2007 and April 2009, from 347,800 to 304,800, that is, by 12.4% in two years. Difficult to see how estimates of strong underlying flow demand for housing can be sustained.