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A graph shows the problem but what is the solution?


Ireland is in thrall to debt, like the rest of the world.

Ireland is in thrall to debt, like the rest of the world.

Ireland is in thrall to debt, like the rest of the world.

In my line of work, one gets to see a lot of graphs. Most of them, it seems to me, could tell their tale better in words. But one last week may have been worth the proverbial thousand.

It was presented by Dirk Schoenmaker, dean of the Duisenberg School of Finance in the Netherlands, at the Central Bank/IMF/CEPR conference on the results of Ireland's adjustment programme (that's the one Christine Lagarde attended) and it couldn't have been simpler.

The graph married the ups and downs of economies (GDP) with the ups and downs of the financial cycle - essentially the rise and fall of credit. Up until the 1980s, they move pretty much in tandem.

Since then, the credit cycle has become more violent than the economic one. In the Great Bubble and Burst, the swing in the financial cycle was five times as large as the rise and fall of output, which itself set new records.

Here was evidence that something had changed since the 1980s and that whatever it was has been getting worse.

It offers circumstantial evidence that this coincided with de-regulation of financial services and considerable dismantling of controls on international movement of capital.

It brought to mind a neat cartoon when the 1986 "Big Bang" demolished the protected, self-perpetuating structures of the City of London. It showed a clearance sale shop window - "Everything Must Go; bowler hats, rolled umbrellas, old-school ties." The City did not seem the right way to do business back then. Now, one cannot help but wonder.

The remarkable thing is that, having got ourselves into far worse trouble than the old brokers and jobbers managed to create, no reverse version of the Big Bang is in the offing. There are no plans for a Big Crunch to limit the gargantuan swings of the present financial cycle.

Take the case of Thor Bjorgolfsson. He seems to have been Iceland's equivalent of Derek Quinlan, Sean Quinn and Sean FitzPatrick rolled into one, accumulating a paper fortune of €4bn during Iceland's banking bubble.

Unlike them, in a most un-Irish fashion, he has written a book about it. Not only that, he took a front-page advertisement in his country's biggest newspaper to apologise for his part in the destruction of the financial system.

Odd enough, but even odder is that he is back in business, running an investment group, and both JP Morgan and Bank of America have contacted him about backing any future deals.

Mr Bjorgolfsson thinks they must be mad. He is not the first financier to think there is something wrong with the system from which he makes a lucrative living.

George Soros was famous for his timing of huge investments - especially that against sterling in 1991 - but he moved too soon in warning that the new financial system is dangerously unstable. That was 1998 - a decade before it crashed - and Mr Soros has never quite got the credit he deserved for the accuracy of his analysis.

Nor is anyone much minded to follow the suggestions in his later books for making the system less dangerous.

The harsh political reality is that so much of our prosperity in recent decades has been based on the accumulation and re-cycling of debt that no one wants to curtail it. Especially when prosperity is in short supply, as it is now.

Which brings us back to Mr Schoenmaker, who boldly tackled on Irish soil the thorny question of limits on mortgages. "If you really want to prevent another property bubble, you have to have more equity in house purchases. If you don't accept that, the pattern will repeat itself."

You can't get much bolder than that. A few years ago I would have said he was making the mistake identified by the Canadian economist JK Galbraith in his book about the 1929 crash.

This was that people try to prevent the same disaster happening again, when the same disaster was actually the least likely thing to happen.

He thought that bubbles and bursts came when the last people who remembered the previous one had gone from the scene. That made it safer than it seemed to reflate with more debt after a crash.

But with three crashes since 1987, each worse than the last, and each rescued by ever more central bank intervention, it would seem most unwise to assume that the next one is decades away.

At the Davos summit, Ken Rogoff of Harvard University, who has specialised in studying the crash, noted that central banks are surprised by how difficult it is proving to create inflation.

This may explain the ECB's dramatic conversion, with over €1 trillion due to be injected into the system over 18 months, but it does not instil much confidence in the global response.

The IMF global update, which coincides with Davos, examines where any new crash might originate. It identifies emerging economies, where lower prices have hit the finances of oil exporters and commodity producers.

The system is capable of producing hugely destabilising reversals of capital flows if any kind of panic sets in.

It is too late for Ireland to erect defences against those particular risks. Nor is there any reason to think that a property bubble is brewing. But the size of public and private debt levels is a real and present danger.

The issue is whether we are willing to pay the price to be able to withstand another upheaval, whether in a few years' time or longer. Mr Schoenmaker's question needs an answer: do we want to prevent another property bubble and another public finance bust?

The question was hardly raised at all in the arguments about the Central Bank restrictions on mortgage lending. Debate was almost entirely on the effects on house purchasers. It seemed that no one is in fact worried about the prospect of another global crash, despite the underlying forces encouraging just such a thing.

Senior Department of Finance official Ann Nolan replied to Mr Schoenmaker by saying that tight mortgage restrictions were unfair to those whose parents were not able to help with a deposit.

As a civil servant, Ms Nolan must reflect government policy. That policy, like those of every government before it, would seem to consist of appearing to help people buy homes while applying measures, like 100pc mortgages, which actually increase prices and risk bankrupting large swathes of the unfortunate purchasers or their lenders.

In this, Ireland is like much of the rest of the world, in thrall to debt because of its ability to supply instant gratification The fact that countries, companies and households which resisted debt's siren song came out best in the end just does not seem to register.

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