Tuesday 12 December 2017

Banking Inquiry: Construction boom was like tumour squeezing economy - ESRI's FitzGerald

Clodagh Sheehy and Niall O'Connor

The construction boom was like a “tumour which grew and grew and squeezed the rest of the economy” the Banking Inquiry was told today.

Prof John FitzGerald, Research Affiliate at economic think-tank the Economic Social and Research Institute, said failure to control the surge in investment at that time “proved fatal”.

When the property bubble got out of control between 2003-2007 the demand for credit to fund investment was outstripping the banks ability to fund it, he explained.

The number of houses being built was running ahead of ahead of the population and people expected to house prices to rise in the future which made buying better than renting. This all led to the bubble.

Prof Fitzgerald, who is a member of the Commission of the Central Bank, said it was impossible to identify when the bubble became irreversible, when a collapse became inevitable.

“With the benefit of hindsight, probably the last chance to stop the build-up in debts and the loss of competitiveness was in 2006.

“By the end of that year and moving into 2007, house prices were so far above their equilibrium level that a collapse became inevitable.

At that time the danger was apparent “even if disaster was not certain”.

The bubble could have been prevented he added, by prudent fiscal policy and prudential policy by the financial regulator - the Central Bank.

If the credit channel had been “choked off” in the 2003-7 period by the regulator “this would have halted the rise in house prices or, at least, achieved an appropriate moderation.”

He stressed that when the economy was growing rapidly successive governments pumped in money which contributed to the problem.

Between 2001 and 2007 he had recommended specific fiscal interventions to manage the housing market.

Fiscal instruments could have been used, he said, “to take the heat out of” building construction.

He said he felt he had made a serious mistake in not examining bank data at the time. “Its a regret”.

“Not seeing the unsound nature of the banking sector was a bad mistake”, he said.

Prof Fitzgerald also criticised the  Department of Finance  which did not consult with us on  the banking guarantee. Relations were ‘frosty’, he added.

He also said the ESRI failed to foresee the "catastrophic" collapse of the financial sector, the Banking Inquiry has heard.

Professor Fitzgerald of the Economic Social and Research Institute (ESRI) has taken responsibility for "serious" mistakes made by him and his colleagues.

He told the inquiry today that he no longer stands over a statement made by the ESRI in 2008 that the "fundamentals of the Irish economy are sound".

Several members of the inquiry questioned Prof Fitzgerald over whether he was influenced by those in political circles.

He insisted that he ignored any "political comments" but admitted that the Department of Finance "became a bit more grumpy" over time.

"Our job is to call it as we see it, without fear or favour," he said.

In relation to a piece of economic analysis produced in 2006, Prof Fitzgerald said senior people in the department became "upset" at some of the ESRI's findings.

At this particular time, Brian Cowen was the line minister, Prof Fitzgerald told the Inquiry.

However, he said that he attended events with Mr Cowen present and that no such sense of upset was communicated by the then minister.

At several points during the hearing, Prof Fitzgerald expressed deep regret over some of the mistakes he said he made.

Inquiry chairman Ciaran Lynch interjected and said that this sense of regret had been made up to ten times and that members should no longer pursue this element of Prof Fitzgerald's evidence.

"Nobody was telling me what to do, it was my fault, and I made a mistake," he said, adding that he would take that sense of regret with him "until the day I die".

However, Prof Fitzgerald expressed frustration that he and his colleagues were being viewed as "cranks" and were at the receiving end of criticism from publications such the Irish Independent and the Irish Times.

"I felt we were isolated, people were not listening. People just didn't want to know," he said.

Asked by Labour senator Susan O'Keeffe whether he ever considered resigning, Prof Fitzgerald said he did not.

"I felt that I had done a reasonable job over the previous 30 years," he said.

Prof Fitzgerald detailed how he presented his concerns about a potential crash in correspondence with the Financial Regulator.

After a visit to Warsaw in Poland, he became aware that several Irish developers were investing heavily in property over there.

He said he was concerned, as an economist, that these investors had "leveraged" large amounts of money from banks in Ireland.

"It really scared the wits out of me," he told the Inquiry.

"It was part of a process where information came my way and I was concerned," he added.

But after highlighting his concerns in a letter to the Regulator, Prof Fitzgerald said he received a reply from "somebody senior" in the Central Bank.

"Their reply did not reassure me," he added.

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