Monday 23 October 2017

Analysis: If we're idiots, Mr Lane, it's because we are allowed to be

Prof Philip Lane Photo: Tony Gavin
Prof Philip Lane Photo: Tony Gavin
Sinead Ryan

Sinead Ryan

The Governor of the Central Bank, Philip Lane, is a very smart man. Before taking up the post he was Professor of International Macroeconomics and Director of the Institute for International Integration Studies at Trinity College Dublin, no less.

So when he gives a speech telling the rest of us we're basically financially illiterate and innumerate, he probably has a point.

It's not very nice to hear however.

In yesterday's address at UCC he said we (and he included pretty much all of us, it has to be said) had a tendency to "make poor financial choices", "take on too much debt", "misunderstand risk" and buy the wrong financial products for the wrong reasons.

For anyone still reeling from the recession, in debt to the banks, and behind on our mortgage, it's a bit like telling us we should wear a warm hat the day after Storm Doris.

Economists (and Dr Lane is one of our most eminent) largely believe the wisdom that has been handed down from their idols over the centuries - the Adam Smiths and John Maynard Keynes - that people tend to act in their own self-interest.

They do what's good for them, and their families economically and logically, and not necessarily what's good for society.

That's why they need governments to sway monetary and fiscal policy so that the little people don't screw the whole system up.

Balderdash

That, as it turns out, is balderdash.

People make decisions about every little thing, every day, depending on mood, impulse, how happy or sad they feel, how wealthy they perceive they are, and what the neighbours are doing.

You might buy a chocolate bar in the supermarket for your three-year-old to stop a tantrum.

You are not, in that instant, thinking about Ireland's obesity crisis, or how much a Twix costs compared to the wholesale price of cocoa beans 10 years ago.

So yes, Dr Lane, you're right.

We're idiots.

But here's the thing: we were allowed to be idiots.

Government policy and lax banking controls positively encouraged us to be idiots.

So he is also right about us needing a Big Brother, preferably one wielding a big stick.

He's the current BB, so he has lots of plans about how he's going about it.

There are reports and commissions, committees and legislation, all to mind us in the future.

It would be great if the same foresight and attention was given to minding us now, from the same systems and policies that have us festering in a mire of debt - much of it, despite Dr Lane's premise, not of our making.

Over-borrowing is a terrible thing, and it is quite right that it is controlled, so people (the idiots) don't lose the run of themselves.

So it's curious that one of the key decisions Dr Lane recently took was to remove the cap on mortgage lending to first-time buyers.

Instead of compelling them to prudently save up 20pc of anything over the original €220,000 limit, they now just need 10pc of any old amount at all.

Coupled with some banks' generous 'cash back' mortgage payouts and the Budget decision (which he went along with) to subsidize first time buyers with taxpayer-funded grants to buy houses, it's put a gallop in the step of the very type of people that ended up in a hopeless property bubble 10 years ago.

Someone in a decade's time might even call them idiots.

Perish the thought.

Irish Independent

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