“the pathetic revisionism of many who are mouthing platitudes..”

In the Sunday Business Post, David McWilliams has some criticisms, and suggestions, on the financial crisis. Probably applicable elsewhere..

Was it a well-orchestrated conspiracy by a few very wealthy people? Was it simply mass plutocratic hysteria or was it appalling governance at every level of the Irish state from the Financial Regulator, the planners and the Department of Finance? Maybe, it was a combination of all three, with a bit of half-assed ideology stitching the fabric together. One other thing is clear: the media – much of them now baying for blood – were as culpable as any other influential sector of our society. The media, which should have been critical and alert to the threats to our prosperity, caved in and believed the hype.

Adds Everyone’s hero [Everyone’s? – Ed], Robert Peston has more on what’s under consideration.

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  • David

    I suppose most people had a bad feeling about the massively inflating property prices, it is just that the only consequences that we could foresee was a collapse in prices and maybe a few years of negative equity if we were unlucky, while being quids in if we weren’t.

    Unfortunately the speculative/bubble nature of the collateral held by banks themselves should have been obvious, especially after the`Northern Rock collapse, but it wasn’t. Nobody wants to listen to a doomsayer when they have just bought their third investment apartment in Bulgaria.

    With hindsight the Celtic Tiger made Ireland part of the rich world, not the poor relation always seeking a handout; that is unquestionably a good thing.

    As for the future, I am not convinced that deflation is always worse than inflation. The policies of most western governments seem to be focused on “stimulating demand” which basically means more of the same, but with the hard pressed taxpayers guaranteeing a bail out that they cannot afford if things go wrong. While this may ease the pain in the short term it could lead to Latin American style economic collapses which are a lot worse than anything that we have experienced so far.

    Unfortunately the tough news is that we will have to get used to a falling, not rising standard of living. Politicians do not want to spell that out, but it is a fact.

    McWilliams proposal of 20 year averages for collateral seems sensible, though it would mean that virtually nobody who does not have one will be able to afford a house and I am not convinced that it will halt the decline in property prices any more than the current policies.

  • Greenflag

    It was just human ‘greed’ unadulterated, by the financial institutions and property speculators and ordinary people and negligent governments throughout the Anglosphere in the main which delivered this mess . McWilliams suggestion sounds sensible in retrospect but at this point I’d have to agree with David that while it may provide a fix to prevent or reduce the extent of future property bubbles it’s not the ‘fix’ that the present western economies need .

    As for the self flagellation of the Third Estate ? it seems that the watchword for most financial journalists this past decade was not unlike that of our politicians

    ‘There go my readers (voters ) I must follow them ‘

    Collateral is banking’s rock of ages . No collateral no loan – at least none at reasonable rates of interest . This ancient formula broke down during the past decade as all kinds of new ‘financial ‘ tools were devised to make paper turn over more quickly and increase the profits of the financial sectors in the Anglosphere and elsewhere .

    If ‘property ‘ loses it’s role as ‘collateral ‘ what would or could take it’s place ? Child slaves ? Third world organ body parts ?

    At the risk of being branded a doomsayer -although one not yet ready to don the sandwich board with it’s end of times message – I’d aver that there is no one yet on the international economic scene who has come up with any quick way out of this impasse .

    We had thought that ‘revolutions ‘ and widespread societal disruption were a thing of the past for western societies . But as we learnt from the Weimar Republic even the wealthiest and best educated of peoples are ‘prey ‘ to simplistic ‘solutions ‘ if spun by a plausible politician . Who now recalls Senator McCain’s proclamations just a couple of months before election day that the ‘American economy was fundamentally sound ‘ 🙁

    How out of touch with economic realities can our Irish /British politicians become ? About as much if not more so than Senator McCain .

  • David

    I don’t see any evidence that Obama has much of a plan either. Remember the near collapse of the banks in October. There was a lot of inaction, because nobody had a clue what to do, then G Brown came up with his plan and everyone else just followed. We are in unprecedented times and none of the experts have much of an idea how to change things.

  • Greenflag

    ‘I don’t see any evidence that Obama has much of a plan either. ‘

    How to stimulate people who have nothing left to spend , to spend more will require firstly the restoration of political confidence and secondly the priming of the public sector pump and of course putting more money into those hands who will spend it . Traditional Keynesianism so far but at least Obama and his advisors seem to be aware that root and branch reform of some sectors of the US economy (e/g health care , education, financial services etc will require major reform in order for americans to ‘recover’ from the self inflicted wound of assuming that ‘business’ always knows best . It doesn’t as we have seen and neither of course does ‘government ‘. But Government is elected – ‘business ‘ isn’t – and a democratic government’s first responsibility is for the security of it’s citizens.

    ‘ We are in unprecedented times and none of the experts have much of an idea how to change things.’

    True. It’ll be ‘muddle through here and there until some major economic power breaks the logjam . Most ‘experts’ seem to realise that with 6 billion on the planet – governments cannot simply sit back and wait to see the fallout from the collapse of entire economies in the hope of getting it ‘right ‘ next time . In a volatile nuclear armed world there may be no next time . Governments and societies can’t afford to sit around and wait for ‘laissez -faire 19th century economic policies to work and/or hope for ‘nature ‘ to intervene and take it’s course .

  • Mack


    McWilliams proposal of 20 year averages for collateral seems sensible, though it would mean that virtually nobody who does not have one will be able to afford a house and I am not convinced that it will halt the decline in property prices any more than the current policies.

    While I agree with most of what you say – this makes no sense. New home owners will always be able to afford a house – providing they earn enough to pay a little more than building costs.

    If banks need to cut their lending, prices will fall to the level supported by the amount they can lend. McWilliam’s idea puts a floor on this level. During the boom almost anyone who wanted could buy a house – lending terms were so loose (7 times combined income, 100% or more mortgages were common).

  • Mack

    And, of course the collary – almost anyone who wanted to fund any mad-cap development could borrow to do so…

  • David

    The Peston piece is an excellent one.

    The banks have made big loans with dodgy collateral. This has now come home to roost and as a result they are teetering on the brink of collapse. Economic prudence would suggest that they cut back on lending to avoid future risk. Gordon Brown’s solution – get them to lend MORE…..

    Several of the UK’s biggest banks have liabilities that are larger than the country’s GDP. Guaranteeing their losses will quite literally bankrupt the country if any of them goes under.

    A series of major bank collapses, or even a single collapse of a big bank, would devastate the economy in a way that makes the reduction in economic activity look like the metaphorical Sunday School Picnic.

    This is why I say that a future economic strategy must be low risk for the banking sector. Trying to get the banks to lend more is very high risk. Painful as it is a contraction in lending and in economic activity is preferable to more lending merely to keep demand high.

    I think the success of Brown’s original bail out has negatively affected his judgment.

  • CS Parnell

    Several of the UK’s biggest banks have liabilities that are larger than the country’s GDP

    No, they don’t. If you think otherwise prove it please. They may have combined liabilities so big but that involves a huge degree of double and triple counting. So what in any case? Liabilities in balance sheet terms mean little – the cost of servicing the liabilities is what matters.

    But that aside, this is a site about Ireland.

    So this must be the moment when Irish progressives break free from the post-1997 consensus that the only way to keep the Tiger alive is to feed the super rich with ever more money.

    Can we have John Bruton and Dick Spring back please? Seems they were right all along and that Bertie, well – who can trust a man who doesn’t even have a bank account?

  • Dave

    McWilliams is close to the mark on two critical points but not close enough. There are essentially two problems here: the systemic risk and the inadequacy of the mark-to-market model that is used by the lenders to value residential property.

    I find it interesting that folks criticise the outcomes of monetary policies without seeking to hold to account those who are responsible for devising those monetary policies. Monetary policy is “the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.” Since all of that monetary policy went tits-up under the control of the ECB, it seems bizarre to perversely exclude the ECB from criticism for the consequences of its monetary policies and to focus criticism on those who have no control over monetary policies because they have transferred that control to third parties (i.e. the Irish government) and also to focus criticism on the pawns of the ECB’s monetary policies while excluding the customers of the banks from criticism for their own actions in borrowing money.

    By the magic of Google, I’ve managed to find a long and lumbering post by a poster called ‘Dave’ on a forum called ‘Slugger O’Toole’ from Nov 21 that explains this in more detail:

    [i]“There’s no evidence that interest rates would have been substantially different under the Irish central bank.”[/i]

    “A better analogy would be that it is akin to arguing that no blame should be attributed to the drunken driver of a car who killed his passenger by crashing into a wall because there is no evidence that the passenger wouldn’t have been killed anyway if he was drunk, driving the car, and crashed into a wall.

    The ECB is responsible for the consequences of its flawed monetary policies. It was its policy to keep interest rates too low for too long in order to promote economic growth by promoting consumer spending with borrowed wealth. This policy produced short term economic growth as people went on a spending spree with the borrowed wealth but did not factor in the equation whether or not people were earning the wealth to repay the borrowing by their means or were investing the borrowed wealth in assets to repay the wealth by that means. In fact, people were living well beyond their means (as personal loans and credit card debt testify) and were investing the wealth into assets that were inflated in value by the availability of cheap credit and that would be vulnerable to rapid deflation of value when the bubble burst, thereby exposing both the lender and the borrower to loss. The problem this ECB policy has now left its member states with is that a huge proportion of the wealth they now earn will have to be used to repay the borrowing that sustained the short term growth they experienced, and not used to promote future growth. So, in effect, you have to earn the wealth to repay the wealth that you borrowed and you have to do that while in a recession.

    Would the Irish Central Bank, if it still had sovereignty, have followed the policy of the ECB? Judging by precedent rather than prophecy, probably not. They have usually been very prudent, and have very strict criteria for devising monetary policies that take account of the underlying dynamics of the Irish economy. It is easy to calculate what interest rates would have been set at by the Irish Central Bank under the Taylor rule. Davy, a division of Bank of Ireland, did the calculations and showed that the ECB was setting interest rates a full 4 percentage points below the needs of the Irish economy. If those interest rates were set at the appropriate rate of 6% by Irish Central Bank instead of the widely inappropriate rate of 2% by the European Central Bank, then it is undoubtedly true that Irish consumer would not have borrowed so much money and that Irish banks would not be exposed to massive write-down’s in the value of their loans. For example, 340,000 houses in Ireland are vacant. The reason that this cheap credit played a role in creating the housing bubble and creating so many vacant stock is because no tenants were required to repay the mortgage and to make a profit. The law of supply and demand went out of whack as a result of the ECB’s monetary policy because the buyer purchased the property for no function other than flipping it during a process of rapid hose price inflation. This model of creating wealth was akin to a pyramid scheme.

  • Dave


    The Irish government could have warned against the dangers of the ECB’s monetary policy of flooding the Irish economy with cheap credit, but that would have drawn the public’s attention to the folly of Europhiles surrendering sovereignty to third parties and this Europhilic government’s intent is to achieve full integration with the EU. It could also have imposed higher stamp duties on properties as a means of compensating for its lack of sovereignty over its monetary policy, but that would have been pissing in the wind since a government must avoid a situation whereby the agency that controls its monetary policy is using it to influence its economy in one direction and the government is trying to influence it in another direction. To avoid the conflict, that is why the Bank of England and the Federal Reserve are nominally independent from government but obliged to follow the economic policies of the government. Unfortunately, no such obligation applies between the ECB and the Irish government, so the Irish government must simply follow the monetary policies of the ECB and make sure that its own economic policies do not conflict with it. The ECB controls the Irish economy and it has now turned a solid growth economy into a dismal failure. You have the Europhiles in the Irish government to thank for that.

    To clarify: because the mortgage repayment was so low and the housing market was experiencing rapid inflation, an investor didn’t require a tenant to repay the mortgage. His model of creating wealth was to buy the house, wait a year for it to inflate in value, then resell it and realise his equity gain as a profit. Great, except that banks use a mark-to-market model in valuing property which assumes that the law of supply and demand attaches a value to the properly in accordance with either of its two functions, e.g. a private residence or a property which the buyer lets to tenants. This third category of ‘flipper’ knocked the equation out of whack and this category was the creation of the ECB’s monetary policy which created this category by suppressing interest rates, thereby allowing the flipper to hold the assets for long periods with a minimal mortgage payment that would be easily offset against gains in inflation of the asset. If the interest rates were set at the correct level, this category would not have arisen and 340,000 houses would not have been built – which means that folks would not be repaying mortgages on properties that produce no income or facing massive write-downs in their value, taking an entire generation of entrepreneurs out of the equation and ensuring that their disposable income along with their creative energy is disposed of in unproductive repayment of worthless assets. The economic effects of this wasted generation who are now prisoners of vacant properties will be wholly negative, ensuring that the Celtic Tiger is well and truly dead.”

    The one sure way to avoid a systemic risk is to (a) fully separate commercial lenders from the unstable mortgage market, and (b) for each country to retain sovereignty over the process, thereby creating a natural firewall which prevents morons in one jurisdiction from infecting other jurisdictions with criminally reckless monetary policies aimed at promoting spending by promoting borrowing. In the case of the ECB, the Federal Reserve and the Bank of England, while all three agencies were sovereign, the ECB followed the flawed monetary policies of the Federal Reserve in order for the slow-growing EU region to keep pace with the US economy, and the Bank of England followed the flawed monetary policies of the ECB in order for the UK to keep pace with the EU. All of them tried to operate as one ‘global’ economy and all of them became infected by the same flawed policies. The deputy governor of the Bank of England has now admitted that they got it badly wrong by keeping interests rates too low for too long. In other words, they followed the same flawed demand-side policies of the Federal Reserve and the ECB, and they, unsurprisingly, ended up with the same results.

    I regard to the mark-to-market model, well, there is a Nobel Price for the first person who can devise a failsafe method for how to value property. The banks, as I said, don’t even acknowledge that a third category of buyer exists.

  • Mack


    Did the Irish Central Bank, or Financial Regulator do a single thing to contain the house price boom?

    Or did they consent to the relaxation of lending practices in relation to mortgage lending?

  • Jack Daniels

    It is quite easy to damp down a bubble. If raising interest rates is not an option, raising taxes is perfectly feasible.

    The problem is that no elected politician wants to be the person who (to use Paul Volker’s phrase) takes away the punch bowl just as the party gets going.

    In both the UK and the ROI we taxpayers pay our political leaders substantial salaries and pensions to act responsibly, and they fail us time after time after time. Why are they so well rewarded for such incompetence?

  • Glencoppagagh

    “It is quite easy to damp down a bubble. If raising interest rates is not an option, raising taxes is perfectly feasible.”
    Not that easy for politicians unless they don’t want to be re-elected. However, the regulators in the UK (and Ireland?) have at least prudential powers over the banks but failed to exercise them. It would be understandable if they too were a bit reluctant to take away the punchbowl and spoil the party in case it got out of hand.
    Especially when dealing with economies where everyone thinks they must become owner-occupiers by their mid-20s.

  • Harry Flashman

    It’s easy to say it’s all the bankers’ fault, or the property developers are to blame, or the government should have done more or whatever, the fact remains that we as a society all fully bogged our arms in along with everyone else.

    Unless some of us here were leading lives of aesetic hermits in idyllic reclusiveness on an island on a lake somewhere then I guarantee we all played our part in this bubble. We swiped our credit cards, we took out cheap loans, we took holidays in exotic locations we never dreamed we could afford (we couldn’t) and we spent, spent, spent.

    We were like Cinderellas at the ball, we knew what was going to happen at midnight, but the music was so divine and the prince so dashing but we absolutely promised, we swore we would leave at five to midnight.

    Problem is none of us had a watch.

  • Dave

    Mack, it’s a non-argument to claim that the flood of cheap credit is the fault of those who failed to stick their fingers in the dyke. The flood of cheap credit is the fault of those whose policy it was to supply cheap credit. The monetary system didn’t fail. The monetary policy worked exactly as it was supposed to work: the agencies who controlled the supply of credit intended people to borrow it and to invest in the trinkets of the consumer society. It is called stimulated economic activity on the demand-side. This policy works in short doses, but in longer doses, it created debt and not wealth. If you try to dispute that, I need only point you to an unsurpassed mountain of debt that it has created.

    The economic theory behind it is not a mystery, even if it now suits the same morons who wrecked economies to now pretend that they can’t fathom why folks borrowed so much money or why other folks lent it to them. They borrowed it because it was the monetary policy of the relevant governmental agency that they should borrow it. That’s how it works: loan it cheaper, and folks will borrow more of it; make it more expensive to borrow it, and they only borrow it for reinvestment purposes (that doesn’t include, by the way, Range Rovers with blacked-out windows that cost 130,000 euros each).

    As I pointed out, there cannot EVER be a situation where the monetary policy conflicts with the economic policies of the government. You cannot have a situation wherein the agency that controls the monetary policy is using it to stimulate consumer spending while the government is trying to constrain consumer spending. Monetary policy is an absolutely vital tool for controlling the economy. As Keynes said, “Whoever controls the currency controls the country.” Because, for example, the Bank of England is obliged to follow the economic policies of the British government, there is no conflict between the different sets of policies. The Irish government has no control whatsoever over its monetary policies, therefore, in order to avoid the fatal conflict, it must simply follow the monetary policies of the ECB. It is utterly silly to even argue that the Irish government must try to resist the monetary policies of the ECB. It cannot, so it must simply follow them. That means that if the ECB decides that consumers need to spend more money, and they to borrow it in order to do that, then that is the monetary policy that will control the economy.

    In Ireland’s case, of course, it had a pronounced ‘bricks and mortar’ culture that ensured that such a policy in the Irish context would translate into, well, borrowing cheap credit to put it into bricks and mortar, whereas other cultures would be less vulnerable to that fetish. One size, contrary to EU integration theory, doesn’t fit all – and one size is applied to all with disastrous consequences.

  • aquifer

    It looks like government will have to ‘lend’ money to the economy, by printing some extra that they can reclaim later via tax receipts.

    Best that they do it in ways that are complementary and synergistic. e.g. Paying people to do energy conservation work that boosts spending now and which also saves enough money in the long term to repay government ‘debt’ via taxes.

    Non productive economic activity should be penalised. e.g. inflation would effectively discount commercial rents, boosting company profits.

  • Mack


    I’m not in disagreement with the core of your argument. Where we differ is on the role and responsibility of the Irish Central Bank and the Regulator. They actually alllowed Irish banks to loosen the terms of their lending – from 2.5 times one salary plus a half times another to pretty much “and whatever your having yourself, sir!”. The change from prudent mortgages to 7 times combined, 120%, interest only fueled the rise in house prices. Had home buyers not be able to borrow those amounts the crazy developments the banks bet all on with European money would have been very obviously uneconomic (and would not have happened).

    The Irish Central Bank and Regulator were asleep at the wheel. The did nothing.

    This bubble occured on their watch. They did not even realise it was a bubble.

    Their actions fueled rather than tamed the bubble.

    This bubble started prior to Ireland joining the Euro.

    Had we not joined the Euro and this bubble still occurred, it would have been funded by wholesale borrowing in a foreign not domestic currency (Euros). The Punt would be a basket case right now, the IMF would be dictating it’s terms.