Business Irish

Tuesday 20 February 2018

We've had the 'who' and 'how' of the banking crash – now for the 'why'

Brendan Keenan

Brendan Keenan

MOST of the many books on the banking and economic crash have been concerned with who, and how? Who did what, who was to blame, and how exactly did they contrive to create such a disaster?

The authors of 'The Fall of the Celtic Tiger: Ireland & the Euro Debt Crisis' think there is another question worth posing. Why? Why did bankers apparently lose all sense of banking; regulators of regulating; and politicians and civil servants all sense of governing?

Not just in Ireland, either. But the big question in terms of its impact on everyone's life, is why was the bubble and its burst in Ireland the worst of all? In trying to answer this, the book includes a startling and controversial opinion: that the infamous bank guarantee of September 2008 may well have been the "least worse solution available."

Such an unexpected statement has already been the subject of harsh criticism from economist and columnist Colm McCarthy. But it is no harm for Irish readers to at least consider the book's analysis of what economists like to call the "counterfactual".

It is the case that the hyperbole surrounding the guarantee (the Tanaiste's "treason" comment comes to mind) has left many Irish people with the belief that the guarantee is the root cause of their woes. That is certainly not the case.

It may have added to them, as McCarthy asserts and the book doubts, but it is indisputable that, whatever was done in September 2008, the banks were already ruined, the public finances wrecked, and personal incomes doomed to fall by something like a fifth.

Why did that happen, and why was it allowed to happen? The book is a valuable summary and analysis of events, both national and international. The emphasis on the impact of international conditions is welcome, given our insular attitudes on this island, but it is remarkable how much of the Irish analysis still relies on conjecture and what looks like "background only" briefings.

It might have been hoped that the combined abilities of the two authors might have produced more startling insights. Prof Antoin Murphy of Trinity College is an expert on financial bubbles and crashes.

Donal Donovan is a retired senior IMF official, who served on the two main inquiries into the Irish crash and – the book reveals – briefed Finance special adviser Dr Alan Ahearne on the workings of a bailout some 18 months before the actual event.

Prof Murphy brings his knowledge to bear on the nature of the Irish bubble and the causes behind it. Mr Donovan knows what a collapse feels like from the inside and, presumably, has unrivalled contacts among the people involved.

They are surely correct in saying that the absurdly generous tax reliefs in the Budget of 2002 did more damage than the bank guarantee. My own observation was that the extensions of the reliefs did more damage than their original introduction; by driving banks, builders and developers into greater frenzies to get ahead of the deadlines.

But at least we know why they were doing it – to make money: an ignoble motive maybe, but a common one. The question is why did the Central Bank and Regulator let them?

The authors seem as puzzled as anyone else. But they really should have been able to find out more about why analysis by Central Bank staff pointing to the risks was not published, and was not even incorporated into Bank thinking.

The Anglo tapes shed disturbing light on this; suggesting that regulatory staff knew nothing about the state of the banks and – even worse – knew that they knew nothing.

Without a clear answer, the worry must be that there is a flaw in the Irish body politic and the disaster is not just the result of a set of particular historical circumstances. One thing we can be certain of, alas, from the lack of reform, is that if there is such a flaw, it has not been fixed.

'The Fall of the Celtic Tiger: Ireland & the Euro Debt Crisis,' by Donal Donovan and Antoin E Murphy; published by Oxford University Press.

Irish Independent

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