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The Irish Disease

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.

Not unlike in Iceland:


BBC News - Icelandic authorities 'negligent' over banking collapse

Leading Icelandic figures, including ex-Prime Minister Geir Haarde, are guilty of "negligence", a report into the Icelandic banking crisis has said.

See Althingi - Report of the Special Investigation Commission (SIC)
The following is an English summary and excerpts of the report´s findings

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Carrie (migeru at eurotrib dot com) on Thu Jun 10th, 2010 at 09:18:51 AM EST
The executive summary reads very similarly to what happened in Ireland, particularly at Anglo-Irish and Irish Nationwide banks. In general all the banks leveraged the good name and credit ratings of their host Governments for private gain - and then added insult to injury by getting the taxpayer to pony up when it all went pear shaped.

The neo-liberal ideology preaches no state interference - all the while leveraging the state reputation for private gain.  It basically amounts to a claim on unfettered profits at the taxpayers expense.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Jun 12th, 2010 at 06:41:26 AM EST
[ Parent ]
Labour now biggest party - poll
When people were asked who they would vote for if there were a general election tomorrow, the adjusted figures for party support, compared with the previous Irish Times  poll on January 20th last were: Fianna Fáil, 17 per cent (down five points); Fine Gael, 28 per cent (down four points); Labour, 32 per cent (up eight points); Sinn Féin, 9 per cent (up one point); Green Party, 3 per cent (no change); and Independents/ Others, 11 per cent (no change).

The poll was taken on Tuesday and Wednesday of this week among a representative sample of 1,000 voters aged 18 and over, in face-to-face interviews at 100 sampling points in all 43 constituencies. The margin of error is plus or minus 3 per cent.

Most of the research was conducted before the reports of the two banking inquiries were made public but after the controversy about the expenses claimed by Fianna Fáil Senator Ivor Callely.

Just 12 per cent of voters are satisfied with the way the Government is doing its job (down seven points) while 83 per cent are dissatisfied (up seven points).

On the party leaders Brian Cowen gets a satisfaction rating of 18 per cent (down eight points); Enda Kenny is on 24 per cent (down seven points); Eamon Gilmore is on 46 per cent (no change); John Gormley 21 per cent (down three points) and Gerry Adams 31 per cent (no change).

The surge in Labour support over the past six months is the outstanding feature of the poll and it gives credence to Mr Gilmore's claim to be regarded as a realistic candidate for the Taoiseach's office at the next election.

Fianna Fail has historically been the largest party since its formation in the 1920's and has generally polled 40%+ until relatively recently usually forming the Government either singly (or more latterly, as the main party in a coalition.

Labour has, by way of contrast, been historically known as the 10% part either in opposition or propping up a coalition led by either Fianna Fail or Fianna Gael - although there have been a couple of occasions when it has significantly exceeded 10%.

Thus the significance of Fianna Fail polling at 17% and Labour at 32% cannot be gainsaid.   It remains to be seen, of course, whether they would actually poll that in a general election and whether they could translate that into seats given that it is organisationally very weak in many parts of the country.

The other significant factor is that it is Labour and not Fine Gael (the main conservative opposition party) which is the main beneficiary of Fianna Fail's unpopularity.  Ireland might therefore buck the recent European trend of right wing parties making gains in the wake of the banking/financial/economic crisis.

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Thu Jun 10th, 2010 at 04:22:38 PM EST
..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."

Did they act against the advices of professional economists? Of course not. Do the economic advisers still have a job? Of course they do.

by kjr63 on Fri Jun 11th, 2010 at 04:17:18 AM EST
The Dept of Finance Mandarins (Senior Civil Servants) are generally pretty conservative and would have in the past act to reign in huge project over-spends and budget over-runs, but there is little evidence that they had not also bought the neo-liberal cool-aid of increasing reliance on "market" forces and pro-cyclical policies.

The previous central bank Governor is particularly culpable in this regard.  The Irish central bank still has a huge staff despite most of its functions now being performed by the ECB and other financial regulators and there is NO evidence that it had any positive contribution to make whatsoever.  (One staffer I knew confessed to spending most of his time drinking pints and writing the occasional book).

Some independent economists that I have highlighted in previous diaries did sound warnings but were ignored as not being "serious people".  Serious people in this context being defined as the habitués of the Fianna Fail fund raising tent at the Galway races... developers, financiers, movers and shakers and assorted parasites...

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jun 11th, 2010 at 07:26:54 AM EST
[ Parent ]
Pendulum must not swing too far from previous overlending - The Irish Times - Fri, Feb 05, 2010

Banks may have lent too much in an era of ineffective regulation. It is important that the pendulum should not swing too far in the other direction. If SMEs cannot obtain adequate finance, the cost will be slower growth and higher unemployment.

John Kelly is a former head of statistics at the Central Bank

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by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Jun 11th, 2010 at 07:30:08 AM EST
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