The lesson of Ireland’s fall from grace is that we must relearn how money and finance really work

Felix Martin's "Real Money" column.

The publication by the Irish Independent on 24 June of taped telephone conversations between senior executives of Anglo Irish Bank in the days after the collapse of Lehman Brothers in September 2008 has served up a sad reminder of the catastrophe that has befallen the country that was once the European Union’s star performer.

 Asked how he had come up with the figure of €7bn for the emergency funding that was being sought from the Irish government, the bank’s then head of capital markets boasted that he had “picked it out [of] my arse” and admitted “. . . the reality is that actually we need more than that”. Asked why they were taking this loan from the public purse, he joked: “This is a €7bn bridging . . . it is bridged until we can pay you back . . . which is never.”

Of all the disasters of the eurozone debt crisis, Ireland’s fall from grace was the most spectacular. Until 2008 Ireland was the “Celtic Tiger” – a rare example of a European economy in which productivity growth rates exceeded those of the US and the government balanced its books. The crisis suddenly uncovered a very different picture: a Ponzischeme economy that had been built on a property bubble, inflated by hypertrophied banks run by a bunch of shysters.

Fortunately, Ireland has another and more positive claim to fame in this context. It happens to be blessed with one of the richest and most enterprising concentrations of economic academics and journalists in Europe today. If understanding what has gone wrong is the first step to building a better future for the eurozone, then Ireland is in the vanguard. An important new book, The Fall of the Celtic Tiger, by Donal Donovan and Antoin E Murphy, is a case in point.

Donovan and Murphy represent the strength and breadth of contemporary Irish economics. Donovan is an experienced technocrat, a veteran IMF staffer with scars from many financial crises to prove it. Murphy is a distinguished economic historian, as well as one of the world’s leading authorities on the history of monetary thought.

The great virtue of their book is that it does not flinch from asking the question that has been uppermost in the general public’s mind from the start but that has proved mysteriously elusive in most official discussion: who or what, at root, was responsible for the crisis? It is a question that is just as urgent in Britain and the US as it is in the eurozone and Donovan’s and Murphy’s study of Ireland provides a compelling answer.

Yet the answer is one that will seem counter-intuitive to many. This is because, as is the case in the rest of the world, there is already a well-entrenched conventional wisdom about the origins of Ireland’s crisis. This is that a cabal of venal financiers colluded with corrupt politicians to bamboozle incompetent regulators. The subtitle of the journalist Fintan O’Toole’s bestselling exposé Ship of Fools (2009) says it all: How Stupidity and Corruption Sank the Celtic Tiger. Or, as the American director Charles Ferguson put it in the title of his Oscar-winning documentary about the US financial crisis, it was all an Inside Job.

There is ample truth to that version of events, as the recently exposed Anglo Irish tapes have once again demonstrated. Yet how was it that these individuals were able to dominate proceedings? How was the presence of a few bad apples able to spoil the whole harvest?

It is in addressing this crucial question that Donovan and Murphy make their most valuable contribution. The answer to what caused the Irish crisis, they argue, is to be found not at the level of vested interests but at the level of ideas.

The problem in Ireland – a problem that will sound familiar to those in the UK, the US and most other developed countries – was not just “a largely passive government, reckless banks and greedy property developers”. Underlying all of these was “the climate of public opinion”, which not only tolerated but actively endorsed the way these institutions operated.

Where did this unhealthy climate originate? Drawing on financial history, Donovan and Murphy show that Ireland is hardly the first society to get caught up in the idea that innovation and endlessly inflating asset prices are sure signs of success.

Drawing on the history of economic thought, they also show that what is distinctive about the 2008 crisis is that, on this occasion, these mistaken judgements were not just improvised in the heat of the moment, as they usually are. They were given the rigorous approval of a uniquely powerful analytical framework for understanding the economy that a generation of policymakers and the general public alike had imbibed with their mothers’ milk: modern, orthodox macroeconomics. The sin was principally one of omission. This dominant conceptual apparatus “saw little role for investigating the inner workings of the financial system since, ultimately, markets could be largely trusted to self-regulate”.

This analysis of what was ultimately responsible for the Irish crisis is of major significance because it urges a different cure from the ones that are usually offered. If the fun - damental problem was at the level of ideas, then it is at the level of ideas that reform is necessary. Economics must relearn how money and finance work and communicate that understanding to the public.

That might not sound as sexy or as im - mediately satisfying as shaking up the regulators, turfing out the politicians and putting the bankers on trial. Yet Donovan and Murphy are right that without an intellectual shift of this sort nothing will change in the long run.

In a summer when already the governments of Portugal, Greece and Cyprus have been straining once again under the pressure of the crisis in the eurozone, that is a message with wide significance.

A man walks past a Bank of Ireland cash machine. Photograph: Getty Images

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

This article first appeared in the 15 July 2013 issue of the New Statesman, The New Machiavelli

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The deafening killer - why noise will be the next great pollution scandal

A growing body of evidence shows that noise can have serious health impacts too. 

Our cities are being poisoned by a toxin that surrounds us day and night. It eats away at our brains, hurts our hearts, clutches at our sleep, and gnaws at the quality of our daily lives.

Hardly a silent killer, it gets short shrift compared to the well-publicised terrors of air pollution and sugars food. It is the dull, thumping, stultifying drum-beat of perpetual noise.

The score that accompanies city life is brutal and constant. It disrupts the everyday: The coffee break ruined by the screech of a line of double decker buses braking at the lights. The lawyer’s conference call broken by drilling as she makes her way to the office. The writer’s struggle to find a quiet corner to pen his latest article.

For city-dwellers, it’s all-consuming and impossible to avoid. Construction, traffic, the whirring of machinery, the neighbour’s stereo. Even at home, the beeps and buzzes made by washing machines, fridges, and phones all serve to distract and unsettle.

But the never-ending noisiness of city life is far more than a problem of aesthetics. A growing body of evidence shows that noise can have serious health impacts too. Recent studies have linked noise pollution to hearing loss, sleep deprivation, hypertension, heart disease, brain development, and even increased risk of dementia.

One research team compared families living on different stories of the same building in Manhattan to isolate the impact of noise on health and education. They found children in lower, noisier floors were worse at reading than their higher-up peers, an effect that was most pronounced for children who had lived in the building for longest.

Those studies have been replicated for the impact of aircraft noise with similar results. Not only does noise cause higher blood pressure and worsens quality of sleep, it also stymies pupils trying to concentrate in class.

As with many forms of pollution, the poorest are typically the hardest hit. The worst-off in any city often live by busy roads in poorly-insulated houses or flats, cheek by jowl with packed-in neighbours.

The US Department of Transport recently mapped road and aircraft noise across the United States. Predictably, the loudest areas overlapped with some of the country’s most deprived. Those included the south side of Atlanta and the lowest-income areas of LA and Seattle.

Yet as noise pollution grows in line with road and air traffic and rising urban density, public policy has turned a blind eye.

Council noise response services, formally a 24-hour defence against neighbourly disputes, have fallen victim to local government cuts. Decisions on airport expansion and road development pay scant regard to their audible impact. Political platforms remain silent on the loudest poison.

This is odd at a time when we have never had more tools at our disposal to deal with the issue. Electric Vehicles are practically noise-less, yet noise rarely features in the arguments for their adoption. Just replacing today’s bus fleet would transform city centres; doing the same for taxis and trucks would amount to a revolution.

Vehicles are just the start. Millions were spent on a programme of “Warm Homes”; what about “Quiet Homes”? How did we value the noise impact in the decision to build a third runway at Heathrow, and how do we compensate people now that it’s going ahead?

Construction is a major driver of decibels. Should builders compensate “noise victims” for over-drilling? Or could regulation push equipment manufacturers to find new ways to dampen the sound of their kit?

Of course, none of this addresses the noise pollution we impose on ourselves. The bars and clubs we choose to visit or the music we stick in our ears. Whether pumping dance tracks in spin classes or indie rock in trendy coffee shops, people’s desire to compensate for bad noise out there by playing louder noise in here is hard to control for.

The Clean Air Act of 1956 heralded a new era of city life, one where smog and grime gave way to clear skies and clearer lungs. That fight still goes on today.

But some day, we will turn our attention to our clogged-up airwaves. The decibels will fall. #Twitter will give way to twitter. And every now and again, as we step from our homes into city life, we may just hear the sweetest sound of all. Silence.

Adam Swersky is a councillor in Harrow and is cabinet member for finance. He writes in a personal capacity.