On the night of September 29, 2008, ministers and officials gathered in Government Buildings to consider the crisis at Anglo Irish Bank. Their solution was the much-reviled bank guarantee, which has led to Exchequer costs totalling about 50 per cent of Ireland's annual national income.
Those willing to exonerate the decision-makers point to their ignorance of the true extent of insolvency in the Irish banking system. This is a reasonable point – if those who gathered in Merrion Street that night had been informed that every single bank was bust and that the bill for bank rescue would exceed €60bn, leading the State itself into insolvency, they would, on this line of argument, have followed a less costly course.
But they were assured by officials, including the Central Bank governor and the Financial Regulator, that the banks were sound and were experiencing no more than temporary problems of liquidity. The two main banks themselves believed this to be the case at the time.
Given the appalling vista of an unnecessary banking collapse, a broad guarantee with a projected cost of zero looked like a reasonable option. It was widely welcomed, and won the support of Fine Gael and Sinn Fein, although not Labour, when the legislation went through the Dail.
In a book just released, two economists argue, however, that even if the insolvency of the banks had been fully appreciated, the broad guarantee would still have been the best available policy – the first time to my knowledge that anyone has advanced such a thesis.
The economists are Donal Donovan, a former IMF official, and TCD's Antoin Murphy and the book, The Fall of the Celtic Tiger (Oxford University Press), is the latest addition to an expanding literature on the great Irish banking bust.
The decision-makers must have feared some Exchequer costs from the guarantee, although they could hardly have disclosed this at the time. Anglo looked to be in serious trouble, but the faith in Bank of Ireland and AIB was sincere, if grievously mistaken. The gossip at the time was that the guarantee might cost single-figure billions, and that some of the more clued-in senior officials understood this.
Some figure like €5bn would arguably have been a reasonable price to pay to prevent an ugly banking collapse. But the Donovan/Murphy thesis is that, if some oracle had been present in Merrion Street that fateful night and had been able to foretell the full cost of the guarantee, including presumably the consequent insolvency of the Exchequer itself and an EU/IMF bailout, all present would have pressed the same button and opted for the blanket guarantee.
Brian Cowen, Brian Lenihan and their advisers would have had no choice, the authors argue, other than to take the decision actually taken, even had they been equipped with full knowledge of the true and catastrophic loan losses in the banks whose liabilities they were being asked to guarantee. The authors acknowledge that the European Central Bank was applying pressure to avoid the failure of any bank but the notion that an Irish government would have willingly signed up to national insolvency can hardly go unchallenged. It is not even clear that a massive rescue of bank creditors, in the full knowledge that the banks were bust, would even have been feasible.
Had the Government announced that a blanket guarantee for banks acknowledged to be bust was being provided on liabilities, a large multiple of the State's financial capacity, the government bond market, would have collapsed straight away and the events of November 2010 would have occurred immediately.
Donovan and Murphy write: ". . . it is difficult to see how a comprehensive guarantee of some sort covering all domestic institutions could have been avoided."
It is not difficult at all. Countries unable to borrow in the sovereign bond market to support bust banks do not attempt to do so, and fail if they try. The thesis being advanced here is that the blanket bank guarantee was inevitable in all states of knowledge about bank insolvency.
Counter-factual history is a diverting parlour game at best, but this is a pretty implausible contribution.
One of the enduring myths about the Irish financial collapse is that nobody shouted stop, and that no credible warnings were offered early enough to make a difference.
Donovan and Murphy give due credit to the writings, in the years leading up to the collapse, from David McWilliams, Richard Curran, George Lee, Alan Ahearne and Morgan Kelly. But their list is incomplete. William Slattery, the former head of bank supervision at the Central Bank of Ireland no less, penned the following in Finance magazine: "What happens then if there is a major slowdown in credit expansion over the next few years as I expect must occur? It is clear . . . that a decline to a more sustainable level of credit growth will result in the removal of the source of a large volume of expenditure in the economy. When this happens I believe it is likely that the supply of property will substantially exceed demand . . . In that event, a substantial decline in property prices is inevitable. The cost of building houses is substantially less than the current sales prices, reflective of very high profit margins for builders and inflated site costs.
"A return to more normal levels for each of these elements would mean a substantial drop in house prices, perhaps as much as 30 to 50 per cent."
This prescient piece was written, not in 2006 or 2007 when the writing was on the wall and most of the damage had been done, but in the year 2000. In October 2004, when there was arguably still enough time to stop the rot, another Irish economist was quoted in the Economist magazine as follows: "The banking system is heavily exposed: the big Irish banks, such as Bank of Ireland and Allied Irish, are in effect mortgage banks . . . a property crash would badly hit their balance sheets."
Blame for the disaster needs to be allocated as accurately as possible, and the authors quite rightly point to the failures of regulators and bank management in the years leading up to the collapse. But there were more, and earlier, warnings on offer than they have chosen to list. This matters, since it lets decision-makers off the hook.
The book offers solace also to European decision-makers, in particular the European Central Bank, which pressured the Irish government right through the crisis to place the interests of unsecured creditors in bust banks ahead of the solvency of the State itself.
The ECB has, and had at the time, no statutory power to dictate bank rescue policy to any sovereign member state and softened its cough when it came to similar problems in Spain and Cyprus.
Ireland's decision in the late Nineties to abolish the independent currency and join the euro was widely debated at the time and opposed by many in the economics profession.
Here too, Donovan and Murphy treat the policy actually followed (joining the euro was supported by more or less the entire Irish political, media and business establishment) as enjoying the benediction of history.
There is a natural tendency, much in evidence in this volume, to bow to the Inevitability of the Past. After all, it actually happened. The trouble is that no lessons can be learned from a general and universal absolution.
Like all writers who have sought to shed light on these extraordinary events, Donovan and Murphy are forced into speculation and hypothesis, since there has been no comprehensive official inquiry and key documentary records have not been released, or do not exist. Their book deserves a wide readership, but leaves me more convinced than ever that all the errors of the banking disaster are being compounded through the failure to conduct a proper official inquiry.