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Bank Inquiry Reports : “None so blind as they who will not see”
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The Regling /Watson report takes a top-down macroeconomic perspective on the origins of Ireland’s banking crisis. The Central Bank Governor’s report is a ‘bottom up’ approach relying on Central Bank and other documentation to reconstruct in some fine detail the events that led to the collapse of the property bubble that is set to cost this country some €25bn.
Whatever way you look at it, these gentlemen tell the sorry tale of a State that went from rags to riches, lost the run of itself and damn near ended up in rags again.
The reports are complimentary, though the Regling/Watson report a mere 49 pages, compared with Dr Patrick Honohan’s 183 page analysis. Put the two together and a fitting title for the combined volume might be: “There are none so blind as they who will not see.”
The full text of the reports is available on the Department of Finance website, and since they’re both highly accessible – indeed some parts of Honohan’s read like a thriller – they’re well worth a read.
In their introduction REgling/Watson point out that Ireland had never previously experienced a property bubble. This implies that when one was happening under our noses, those who had responsibility to realize what was happ-ening and put a stop to it, didn’t properly estimate the risks that were piling up.
There were failures at all levels of the system, they conclude. Too many people were taken out of the tax net in the real boom that lasted up to 2000 and the ersatz boom that followed it, a demand driven growth based on housing. The boom had brought with it a massive wage rise across the economy, with a concomitant loss in productivity and competitiveness. The number of public servants increased by 15%. The government relied on unsustainable property taxes to finance ever expanding spending plans. Membership of the eurozone provided access to credit for domestically based banks and also facilitated the growth in the number of foreign owned banks competing for property based business, in the name of so-called competition.
The experts lay a good deal of emphasis on the growth of commercial lending in the Irish banking system – to a small group of much the same developers. This meant that one bank was the same as all banks, when the crunch finally came.
Even if Lehamn’s had never happened I”the marked slowdown in the economy, and in the property sector in particular, was
unlikely to end in a soft landing for significant parts of the banking system.,” they conclude. “Serious stress in the
financial system was almost unavoidable.”
“It may also be helpful, after the immediate phase of crisis management, to explore the use of a domestic fiscal rule, such as a medium-term expenditure ceiling, to supplement the EU stability and growth pact,” they conclude.
The section of Patrick Honohan’s forensic analysis dealing with the events leading up to the Bank Guarantee of the 20th September 2008 is likely to command the greatest media pand political interest in the coming days, though his entire report is worthy of careful study.
Honohan conludes that Anglo Irish Bank was systemic and that the Guarantee was justified, since there were no other viable options available at that time. Further, he contends that whether Anglo was nationalized on the night of the guarantee or five months later probably made no difference to the ultimate cost of its collapse to the taxpayer.
“There can be little doubt,” he writes, “ that a disorderly failure of Anglo would, in the absence of any other protective action, have had a devastating effect on the remainder of the Irish banks.
“Given the other banks‘ reliance from day-to-day and week-to-week on the
willingness of depositors and other lenders not to withdraw their funds, and the certainty that those lenders would infer from the failure of Anglo that all the other Irish banks might be in a comparable situation, in all likelihood the main banks would have run out of cash within days. They did not have unused collateral eligible for borrowing at the ECB‘s facilities in sufficient amounts to meet a run on the scale which would have ensued.
“Absent Government support or ELA they would have to close their doors
also, unable to pay out on cheques presented and other payments instructions.
“Closure of all, or a large part, of the banking system would have entailed a catastrophic immediate and sustained economy-wide disruption involving very significant, albeit extremely difficult to quantify, social costs, reflecting in particular the fundamental function of the payments system in a modern economy. These costs would have been broad-based in terms of income, employment and destruction of the value of economic
assets and would have been on top of the recessionary downturn which has actually occurred.
“Considering the experience of other countries in such circumstances, the social and economic costs, if they could be quantified, would surely have run into tens of billions of euros “
So there you have it. Public and political reaction remains to be seen over the coming days, but the debate should be interesting.
The following is a copy of a post to “Irish Economy”.
Has anything good come out of this mess? Well, yes, perhaps there is one thing. A significant portion of the elite of Irish society has been tested and we can separate the wheat from the chaff. Now let’s have a bit of sense and dump the latter.
Let’s get some nonsense out of the way. Everyone is not equally guilty. Everyone was not deluded. Anyone with reasonable intelligence, a bit of education and an interest in the world around them could see where we were heading. It didn’t require a degree in anything – least of all economics – to see first the empty factories, then the unsold houses and the furniture stores at every roundabout. In other words, anyone who failed to see the problem is a fool and anyone who saw the problem and failed to speak out is a knave.
Here are a couple of short pieces from my own blog in 2009 which make the point:
http://colummccaffery.wordpress.com/2009/12/31/appointments-in-irish-banking-and-finance/
http://colummccaffery.wordpress.com/2009/05/13/never-mind-the-landing-who-was-in-favour-of-the-flight/
Here’s one that tackles the habit of hiding behind the term, “culture” be it applied to child abuse or reckless banking:
http://colummccaffery.wordpress.com/2010/03/01/who-would-pass-the-challenge-the-culture-test-decent-people-thats-who/
The point is that the performance of bankers, politicians, economists, journalists and other media personnel, spokespersons, managers etc. can be scrutinized and those seen to lack the competence or integrity necessary to responsible positions can be sidelined.
Colum,
If we round up the knaves and fools in politics, the banks, and the media, and sling them all out – a suggestion with which I concur – the Houses of the Oireachtas will be empty, there will hardly be a teller left in the banks and the business and property sections of our newspapers will be like the Marie Celeste. And that’s even before we get to the Central Bank, the former Regulator’s office and the upper echelons of some Departments of state.
Competence seems to have been in short supply, particularly as regards the regulatory system and its relationship to the financial institutions over a long number of years, as is well documented in Professor Honohan’s report. Integrity is distinguishable by its absence, but cowardice, stupidity and cynicism were, and probably still are, there in abundance.
What these reports point to is the need for a complete overhaul of political, business and media culture in Ireland. Integrity, personal and professional, need to be placed at the heart of it, not viewed as some kind of eccentric personal attribute that occassions titters of embarrassment. Unfortunately, I don’t have a great deal of confidence that this will be the end result – particularly given the predictable kneejerk reactions we’ve had to the reports so far by politicians and the media. These reports also don’t tell the whole story, because they can’t. So the terms of reference for the second stage of this process will be crucial.
Veronica,
That’s just not true. Firsly, there was not universal foolishness or cowardice. A blanket condemnation of all politicians is simply political cynicism or evasion of a responsibility to take sides. An impression of universal foolishness was given by its dominance in the media and this illustrates the need to sideline journalists, producers, presenters etc. who, it is now clear, can’t cope. Secondly, it is more important to replace some people rather than others. It’s not a case of emptying the media, the banks or any other institution of staff. However,it is certainly ludicrous to have as, say, a bank’s chief executive someone who either was too stupid to see the problem or too calculating to speak up.
“Culture” is such a weasel word. If it can be established that there was a lot of wrongdoing, the appeal to “culture” emerges.
This was an interesting read. Thanks for putting it together.
Can I just ask for some closer proofing to future posts? Words missing from sentences, and misspellings really detract from the flow of reading.
Jim,
Sorry about the typoes. I was in a hurry to post the piece (other tasks beckoned – like cooking the dinner!) and unfortunately didn’t get a chance to edit it later on.
Colum,
Far from evading ‘a responsibility to take sides’, I have an independent mind. In may view, proposals, reactions and options advanced by all parties or none should be judged on their merits, not on the basis of a partisan allegience.
Veronica,
The purpose of attending to the full range of arguments is to come to a decision.
Colum,
And the purpose of the article above was to provide a summary of the key points of greatest public interest made by the Regling and Honohan reports, which might encourage people to go off and and read them for themselves. There’s more than enough partisan commentators around, both in politics in the media, to fill the rest of the stage.
But if you want an opinion, here’s one: FG have produced well-thought through proposals for reforming the budgetary process in this country. From what Labour’s Joan Burton was saying on Prime Time last night, there’s a recognition there too that the present system with its pomp and secrecy and centred on one individual cast either in the role of the nation’s Santa Claus or Dr. Doom, depending how many giveaways can be mustered, is just plain daft. (I’ve also posted several articles about this in recent months, and options that might be considered, not that anyone was all that interested).
Economists can talk all they like about how governments should avoid making populist decisions, but the system that we currently have locks them into doing just that. Economists are bound by policy logic; politicians are bound by what’s acceptable to the public and what will play well with their supporters. Richard Bruton on last night’s VB Show pointed out that his party have produced a range of policy options and reforms that will involve difficult decisions, some of which would be highly unpopular but probably in the best long term interests of the country. And look at what that’s done for them in the national opinion polls!
Veronica,
You’ve already offered a strong opinion. Your comment of June 10th says,”If we round up the knaves and fools in politics, … the Houses of the Oireachtas will be empty”. That’s nonsense but unfortunately it’s popular nonsense these days.
It is difficult to see why Colum rounded on Veronica as he has. To me Veronica was guilty of no more than highlighting a few important items from the reports and throwing open the debate.
Tomaltach,
I explained above but I accept that I was harsh. You see, I’m fed up listening to orthodoxy wrapped up as radicalism. All that Veronica did was to repeat a variation of a line that now goes without question. I hear it and read it morning, noon and night – day after day – and always presented without supporting argument. I simply reacted on seeing it this time. It’s what Michael D. Higgins years ago called, “ecumenism of blame”. It makes the speaker seem anti-establishment. There are a few variants on the theme:”all politicians are the same”, “everyone is equally to blame”, “the political class is the problem”, “successive governments”, “we need a new party/movement/alliance” etc. etc.