Tuesday 23 January 2018

Central Bank was hampered by politicians, claims official

The Central Bank in Dublin. Photo: Getty Images
The Central Bank in Dublin. Photo: Getty Images

Brendan Keenan

THE scale of political appointments to the boards of the Central Bank and Financial Regulator meant they did not have the diversity needed to ask hard questions about government policy during the bubble years, the former chief economist of the bank has said.

In an article in today's Irish Independent, Tom O'Connell says "It can be safely assumed" that the civil service did not recommend the policies which are now seen as having caused the most damage.

These "egregious policy errors" included pro-cyclical fiscal policy, property tax breaks, decentralisation and the benchmarking of public sector pay.

Mr O'Connell believes the boards of the banks, their shareholders and the regulatory authorities all failed to deliver the required control and oversight of the banks.

He writes: "It should be noted that during the Celtic Tiger/bubble period, the composition of these boards (the Central Bank and the Financial Service Regulatory Authority) was dominated by political appointments.

"With one political party in power semi-permanently in Ireland -- not unlike the PRI in Mexico -- there was unlikely to be the necessary diversity of views to ask the hard questions and challenge the conventional wisdom."

The Central Bank had the power to change the course of developments in the financial sector, Mr O'Connell says.

Popularity contest

He continues: "To do so would not necessarily have been popular during the mania period. However, the financial regulatory authorities are not participating in a popularity contest.

"In fact, it is a fairly good rule of thumb that the financial sector authorities are doing a good job if they are unpopular.

"The frequently cited comment is that it is the function of a central bank to remove the punch bowl when the party is really getting into the swing."

Mr O'Connell partly blames tight restrictions on rezoning land -- until it was too late -- for the extraordinary rise in Irish property prices.

"The data that I received showed that Irish prices were higher in all the capital cities surveyed, except central London.

"There was clearly something wrong when one could be housed cheaper in Amsterdam -- given the density of population -- than in Dublin."

But he says the vulnerabilities of the banking system were well flagged in the financial-stability reports from the Central Bank. However, in terms of action, the disposition was not to "rock the boat".

Things were made even more difficult for the Central Bank and Financial Regulator by international complacency about the global financial sector excesses which were emerging.

Mr O'Connell adds: "The chairman of the Federal Reserve, Alan Greenspan, is on record as saying that it was difficult to identify an asset price bubble, but he stood ready to pick up the pieces once the bubble had burst.

"This was hardly a very wise approach, given the devastation that can follow an asset price boom and bust."

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