The Essence of the Banking Crisis Remains Hidden
Professor Honohan’s report is wrong. Wrong because it misses the essence of the crisis, by concentrating within the incorrect time line from 2003 forward. The big cock up occurred earlier. The essence of the Irish banking crisis extends back a few years earlier to how the Financial Regulator was established in a devious compromise engineered by The Central Bank in collusion with The Department of Finance to deny Ireland the establishment of a green field financial regulator with a new regulatory culture, new management and a new staff not captive to cosy relationships that spanned decades. This was the recommendation of the Mc Dowell Committee on regulatory reform whose work was undermined by both institutions in favour of a regulatory model that kept real change to a minimum and ensured that the new Financial Regulator would remain a child of Dame Street and Upper Merrion Street and would be led by their own kind of decent chaps who knew how things really worked.
A new regulator would have sundered the lethal nexus of “soft touch” relationships between Senior Irish Bankers, The Dept of Finance and The Central Bank. When the regulated openly lobby for the retention of the regulator you know something is seriously wrong. Irish banks stood against the establishment of a green field financial regulator. The Central Bank hired PR advisors to push its case across the financial media suckering some of its most ardent critics today into adopting its line. That’s when the biggest blunder in Irish economic history was made.
Professor Honohan’s report simply picks up the story several years later, fingering kowtowing relationships between senior regulators, Dept of Finance officials and Irish bankers even in the teeth of reports from officers concerned about excessive risks being taken. The rest is the detail of how the system collapsed in the face of a property bubble burst.
Honohan Nails the Propaganda
But Honohan scores heavily by nailing the propaganda spun by Bertie Ahern and Brian Cowen that, save for the yanks and their Lehmann collapse, Ireland was due a soft landing. In no uncertain terms it tells it as it is – the Irish economic collapse was home grown and was going to happen anyway. That it was exacerbated by the subprime debacle is a given but at its heart was the reckless political strategy of the last Government deliberately aimed at stoking property mania and buying votes. Banks, certain that they had the regulator compromised, did what banks always do when they are not controlled – they went bust. To find out what really happened Professor Honohan should examine how the green field financial regulator was strangled at birth. Then we’d really understand how we came into this mess.
Ivor's Cash Crunch
At fifty years of age Ivor Callely, it seems, simply ran out of cash. So Ivor decided to dip deeply into his expenses, maintaining an unusual story that he travelled to and fro from Kilcrohane to The Senate for over two years at a cost in excess of eighty grand tax free. If you’ve ever been to Sheeps Head peninsula, just about the last thing you’d ever willingly do is to commute weekly to Dublin. It’s God’s country on a fine day, walking the spine that separates Dunmanus and Bantry bays. Ivor should have known better than defy the elements from here. The French fleet came to grief in Bantry bay and part of Irelands biggest cocaine haul was consumed by eels off the rocks opposite Ivor’s retreat.
Ivor’s not alone
The big bust didn't collapse the mortgage debt that supports property investment, the favoured pension plan for most Irish small business people and middle income earners. The bust was followed by the destruction of rental incomes which is why most property investment portfolios are upside down and under severe pressure. That means debt worth more than asset values for lots of people, also known as negative net worth. Meanwhile lower rents (if you can get rents) combine with big losses in normal earned income to crush people’s financial strength and sense of well-being.
It's a real kick in the gut when you’re middle aged and feel the world is finally at your feet to have it all taken away. But that’s what’s facing investors who bet the house on just one asset type – property, especially those who went into 2008 with over 50% borrowings and whose main source of income was dependent on the construction sector. They are in a world of hurt.
Those who’d invested in development hoping to double their cash to compensate for higher risk taking have been wiped. Falling development land values and rolled up interest, has, over two years, gobbled up any remaining equity from The Baltics to the Balkans. Even those who followed the dogma of diversification have faced wipe outs, myself included in a Central European development site. But heavy falls have also been recorded in conservative property syndicates as well as shares, commodities even works of art.
The scale of wealth destruction worldwide runs into trillions and in Ireland into many tens of billions. Those that have suffered most in Ireland are those who took the highest risks, looping the money they earned from services like conveyancing, banking, architecture, plumbing, electrical, plastering, kitchens, tiling, landscape gardening etc. back into the asset class that supported their income - property. The bust destroyed their income and their assets in one vicious swipe.
But Ivor is Hung on his own Petard
Ivor Callely who cheered on a political class that brought Ireland to its knees seems to have dipped into public funds to bail himself out. Ivor isn’t depressed simply because he’s morphed from the Dail to the Senate. Ivor is sick because, in his fifties, his financial position has been undermined, his wife is going back to work and his former Fianna Fail colleagues are largely to blame for stoking up his property values, encouraging further borrowing and giving him an overbearing sense of omnipotence. It is an oily game called snakes and ladders and Ivor, is back at the bottom.