by Frank Schnittger
Thu Jun 10th, 2010 at 08:12:21 AM EST
Having been the butt of Anglo humour for much of the last century, Ireland became the pin-up poster child of the great neo-liberal market revolution during the nineties and early naughties. Never mind that neither stereotype fitted very well: they fitted the larger purposes of their progenitors.
Then came the great crash of 2008, the Celtic tiger was devoured by its own young, and Ireland became a cautionary tale for all who would dare fly too close to the sun god of low tax, easy borrowing, and "light touch" regulation. It was all the fault of the Lehman collapse if the Irish Government was to be believed. Who could have predicted that?
Now two independent reports - albeit commissioned by the Irish Government - have given the lie to all of that. The Irish crash was a peculiarly Irish creation after all.
Reports blame domestic factors for banking crisis
According to the reports major failures in banking regulation and the maintenance of the financial stability of the country - coupled with excessive and high-risk lending by the banks - led to the crisis.
The Government's budgets during the boom years "contributed significantly to the economic overheating", Dr Honohan said, as they relied to an "unsustainable extent" on the construction sector and encouraged the property boom through tax breaks.
"This helped create a climate of public opinion which was led to believe that the party could last forever," he said.
Dr Honohan found that the Financial Regulator was "excessively deferential and accommodating" to the banks, while the Central Bank, led by his predecessor John Hurley, had not been alert to warnings signs of an imminent crash.
There was insufficient awareness or willingness to accept "how close the system was to the edge" and that it was the responsibility of the Central Bank and the regulator to pull it back from the edge, he said.
"Rocking the boat and swimming against the tide of public opinion would have required a particularly strong sense of the independent role of a central bank in being prepared to `spoil the party' and withstand possible strong adverse public reaction," Dr Honohan said.
Pat Neary, the former chief executive of the regulator, said he had no comment. Mr Neary's predecessor, Liam O'Reilly, and Mr Hurley could not be reached for comment.
Dr Honohan said there was "a comprehensive failure of bank management" to maintain "safe and sound banking practices".
The weakness of the Irish banks was not caused by the collapse of US bank Lehman Brothers in September 2008 but by an over-exposure to property driven by excessive overseas borrowing "to support a creditfuelled property market and construction frenzy".
Anglo Irish Bank and Irish Nationwide Building Society were "well on the road towards insolvency" at that stage, he said, while the two biggest banks, Allied Irish Banks and Bank of Ireland, could only have survived without a State bailout if the international financial markets had calmed.
The scale of the Government guarantee raised the cost of the bailout to the State, narrowing options available to fix failing institutions, he said.
The Regling-Watson report said regulation was not "hands-on or pre-emptive" and was "insufficiently intrusive" and "forceful", while resources were "seriously inadequate for the more hands-on approach" required.
Regulators under-estimated the funding risks linked to the banks' over-exposure to property.
"The fact is that supervisors, right to the end, clung on to the hope of a soft landing for the economy and the property market," they said.
The Regling-Watson report found that the Government failed to rein in bank lending and that policies "even fuelled the fire".
So obviously the Government will now resign in the wake of such a damning indictment? Brian Lenihan, the current Minister of Finance, had this to say in response:
Reports blame domestic factors for banking crisis
"Of course the government has to take primary responsibility, but the report does point out the general what they describe as the socio-political context, and the socio-political context was that more and more money was demanded to be spent all the time, and less and less tax all the time."
The hard-hitting reports by the new Central Bank governor Patrick Honohan and international banking experts Klaus Regling and Max Watson published yesterday heavily criticised misguided government economic policies, a weak system of financial regulation and poor bank lending.
"There's nothing in Mr Regling's report that surprises me. I've had to live with these problems since I became Minister for Finance," he said.
"I've had to accept the analysis of this report for over two years now, and I think the Opposition parties should accept it at this stage as well rather than simply oppose everything the Government does, which has been their policies."
Earlier Taoiseach Brian Cowen accepted that policies introduced while he was minister for finance had led to a "deeply challenging" situation for the Irish people and he regretted that. He agreed that a more restrictive fiscal policy would have helped in slowing the economy.
"Hindsight is always clear and obviously we would not have taken such a course if we had known of the scale of the property collapse which was facing the country," he said.
"I deeply regret that."
The opposition has tabled a motion of no confidence in the Taoiseach, Brian Cowen, who was Minister for Finance for much of the period under review. However no one expects the Government (including the Greens) to precipitate a general election now. Turkeys don't vote for Christmas, and the principle of expediency is the guiding principle of Irish political life - as it was for the financial regulators and banking executives who helped create the crisis in the first place. Plus ça change, plus c'est la même chose.