Interesting Reading for FF Apologists

dixiefly

http://www.independent.ie/business/irish/signals-were-flashing-red-on-the-property-bubble-but-were-ignored-2523133.html

Independent.ie
Signals were flashing red on the property bubble but were ignored
Why did no one shout 'Stop'? Former chief economist of the Central Bank Tom O'Connell outlines the many reasons

WHAT was it that led to such a phenomenal increase in property prices during the halcyon years of the Celtic Tiger? My contention is that it was largely due to factors within our own control.

With sensible policies, the bubble and subsequent crash could have been avoided along with the major disruption to society and the country that followed.

It is a truism that supply and demand factors determine the evolution of property and indeed all prices.

In the case of Ireland, a major dysfunctional factor in the property area was the very restrictive zoning policies of the authorities that have been relaxed only in recent times. Such policies were bound to result in large price increases if housing demand increased substantially.

Much of the land that had been zoned was tightly held by major players who had accumulated this land over time. For example, the construction sector analyst, Jerome Casey, has documented how eight major developers had effectively cornered the market in zoned land in North Dublin.

In addition, some of these developers were related to one another, thereby ensuring even tighter control over the release of this land for development than might appear at first glance. With the Irish population's attachment to land and property for all sorts of historical and perhaps psychological reasons, a surge in demand for housing, if it were to occur, was always likely to lead to substantial increases in prices.

Who can forget the crowds that queued overnight to buy housing off the plans? In the event, we know that some of those queueing were paid by estate agents to do so, and the media was contacted to hype things further. This mania extended to the acquisition of investment properties overseas.

As well as creating the conditions for a surge in prices if housing demand increased substantially, a very restrictive zoning policy was also conducive to corruption. It mattered greatly where councillors and planners arbitrarily drew the line on the map for zoning.

Through my contacts with various colleagues in other European central banks, I endeavoured to clarify how Irish house prices compared with those in their countries.

The data that I received showed that Irish house prices were higher, sometimes substantially so, than prices in all other locations except for central London.

What could have been done to limit the bubble? If the authorities had the will, the price of development sites could have been substantially reduced -- literally at the stroke of a pen. A liberal zoning policy would have had the effect of reducing the price of sites like the proverbial stone. Clearly, the surge in the demand for housing could not have occurred without the financing provided by the banks.

From the start of the last decade, aggregate bank credit here increased massively -- averaging 21pc a year up to 2007, when things began to ease.

As Central Bank governor Professor Patrick Honohan stated, such phenomenal increases in lending should have set off alarm bells. Why did no one shout "Stop?"

In this respect, there has been an unfair criticism of civil servants, in my view.

It can be safely assumed that civil servants did not recommend the most egregious policy errors such as adopting a pro-cyclical fiscal policy stance, granting extensive property tax breaks, decentralisation or pushing benchmarking.

It is also clear from papers submitted to the Oireachtas Public Accounts Committee that civil servants actually advised against the blanket bank guarantee of September 2008.

In the light of this, it is worth recalling that the former Minister for Finance, Mr McCreevy, stated on one occasion that, while he listened to the advice of his civil servants, he decided on policy and, if necessary, he could have thrown the advice received 'in the bin'.

In response to rising house prices in the latter part of the 1990s, the economic consultant Peter Bacon was requested by the relevant government department to assess developments in house prices and related issues. In the period 1998 to 2000, Dr Bacon submitted three reports. What is very surprising is that, as property price inflation began to accelerate some time after that, there seemed to be little concern expressed by Government, and as far as is known, no further reports were commissioned.

What is equally, if not more, astounding is that the then Taoiseach has stated in strong language in recent times that he was not informed about the huge increases in bank lending related to the property sector, even though the Bacon reports had been completed and the proverbial 'dogs in the street' were aware of the accelerating house price inflation and the associated huge bank lending increases.

There was a range of levels at which the huge and glaring excesses of the banks could and should have been challenged.

First, the board and top management of each bank have a responsibility to ensure that their institution is run in a prudent and effective way with due acknowledgement of the risks being undertaken.

Secondly, the shareholders and bondholders of the institutions would be expected to be vigilant as to how the businesses in which they have a stake are run.

Thirdly, the financial sector authorities -- the Financial Services Regulatory Authority and the Central Bank -- have responsibility for the oversight of the banks. Given what has transpired, clearly these three layers of control and oversight failed to deliver.

Turning to the Central Bank and the Financial Services Regulatory Authority, it should be noted that, during the Celtic Tiger/bubble period, the composition of the boards of these authorities was dominated by political appointments. Some of them were very prominent figures linked to the major government party.

With one political party in power semi-permanently in Ireland -- not unlike the PRI in Mexico -- there was unlikely, therefore, to be the necessary diversity of views on the board to ask the hard questions and challenge the conventional wisdom regarding the sustainability of what was happening.

In addition, until Professor Honohan's appointment, the Governor of the Central Bank had always served previously as a top official in the Department of Finance working closely with the Minister who appointed him, and the Secretary General of the Department of Finance is an ex-officio member of the Central Bank board. The ubiquitous social partners were also represented on the board.

In their report, Regling and Watson refer somewhat coyly to 'the socio-political context' in which key decisions were or were not taken, indicating that it would have required some courage for the authorities to take a contrarian stance during the mania period.

The point of recording this is that, with the euphoria and hubris of the Celtic Tiger period, the disposition of the financial sector authorities was one of not 'rocking the boat' -- even, one might argue, and as was fairly obvious -- if the boat was heading for the rocks.

Having said that, the Central Bank is a legally independent entity with the capacity, if it so chose, to change the course of developments of the financial sector.

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, and the reason for conferring independence on the institution is presumably to permit this to be exercised in practice, particularly when most required.

In my view, the major vulnerabilities of the Irish banking sector were well flagged in the various Financial Stability Reports produced by the Central Bank and Financial Regulatory Authority over the years, and this is broadly acknowledged in Professor's Honohan's report (par.6.8).

The three main risks facing the banks, as flagged in these reports, were the very large increase in credit across the system, the massive concentration of lending in the property sector and the huge recourse to potentially volatile wholesale funding.

Although it seems that the Irish banks conformed to the EU Directives on regulation and supervision, based as they were on the Basel standards, this did not curb the three main emerging risks.

Professor Honohan's report considers four possible instruments that could have been used to calm things down (Chapter 7).

In the event, he states that only moral suasion and increased capital requirements were employed -- and the latter only in a very modest way and very late in the day.

In all, far too deferential an approach was considered to have been adopted towards the banks, and supervisory implementation was insufficiently forceful and pre-emptive (Regling and Watson, page 37).

Government policy is now focussed on putting the banks that remain on a sound footing and stabilising the public finances with the aid of the EU/IMF programme.

Of course, it would be desirable that holders of senior bank debt rather than taxpayers should bear a large part of the losses incurred by banks and that the interest rate on the EU/IMF support should be reduced.

However, it is clear that these can only happen in the context of a general agreement among EU countries.

In the meantime, there would seem to be little scope for an improvement in living standards for some years, while we deal with our present problems.

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LuckyLloyd

So why weren't the opposition screaming about all of this from every available rooftop during 2007 and early 2008?

I have no intention of voting for FF by the way, but this angle doesn't make me any more likely to vote for FG or Labour...

dixiefly

Fair point, truth is I cannot remember whether they were or were not. However it was Bertie's motly crew that were in and it was tem that had the access to loads of advisors (didnt Bertie signficantly increase the number of advisors the ministers had?).

Also the previous FF/Lab had been prudent in their fiscal policy so it is reasonable to assume they would have continued that had they been in.

[Jackass]

I always take discomfort in how much blame is always thrown back at the opposition to excuse the actions of the Government of the day.

In opposition, you are not always privy to Government issued reports, and when you have an electorate so apposed to your opposition (FG nearly obliterated in General Elections of the time), the public had firmly bought into the hysteria of FF and the inflated bubble of property, spurred on by Governemt and developers.

There's no question, and is touched on in this article, the rife corruption involved in the zoing of land and the monopoly and price fixing formed. As hysteria grew, these developers drip fed developments into the system, and in the end were mostly damaged by their own greed, but much political corruption was highlighted during this time, and as has been said, the FF Government of the day (along with most FF Governments imo) was simply a self serving corrupt Government with little interest in anything otehr than personal gain, greed and power. And it shows.

I find it tough to believe that ANY responsible Economist would have encouraged the fiscal policies of the Gevernment of the day, and the few and far between independant Economists of the day had ALWAYS warned of this crash, from as far back as 2000.... and nothing was done, and neither was such negative opinion tolerated, as any opposition to what was going on was met in the Dail as scaremongering, and quite aggressively so, by Bertie Ahern, and the public, in their general stupidity, bought into it all along the way.

It's a problems of fundamentals in Ireland though, for such a small country, EVERYTHING is politically linked, such as the media, the construction industry and FF is the party of choice to exploit based on the stubborn Irish attitude of being stuck in the dark ages and this pathetic sense of being nationalist and republican and voting based on 100 year old history rather than candidates and policy of the day.

I would LOVE to say that this has all ended now and that the public has woken up, but I have absolute faith in the stupidity of the Irish electorate and am fully confident that the next Government will be a short term fixer upper before Michael and the boys come back into power once we're back on the right track and resume business as usual.

There needs to be a serious overhall of the entire political system in Ireland, and a much more independant decision making process with very little Government involvement and a full annual audit from an independant body of all planning and zoning approvals and a binding panel of assesment on any area sensitive to corruption, where the panel is held fully accountable, and is based on strong reputations of Economists, Professors and experts of relevant areas that are held accountable for their decisions.

If we can dilute the decision making process and make everyone at every stage accountable and tracable for where decisions come from, the scope for corruption is much lestened.

This is they type of reform the Greens, as anti-corruption party, should have been looking for in Government, but have been relatively toothless.

I'm not sure a FG / Labour Government would be in a postion to do this either, but it's certainly something I will be pushing my TD's for when I get home .. absolute transparency and accountability for decision making at local level.

StupidLikeAFox

Isnt the independant the one which is always mentioned as being a Fianna Fail paper?

[Jackass]

Well, yes, Tony O'Reilly had harboured a hatred towards FG since financially backing the John Bruton led FG Government and being denied the mobile phone company contract which was awarded to Eircell and the fury that followed in being unable to buy a Government and get decisions based on old boy club instead of best tender for a contract... But he got in later with Denis O'Brien and Digi-phone, the FF lads happily sorted him out. (despite tenders from major international established operators).

Dating back, most of the Irish media had been dominated by De Valera family prior to the O'Reilly family, and it's rooted in FF to control the media.

But when an unbiased and neutral article appears, I don't think it's sufficient evidence to discredit this.