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

Photo: Getty
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How our actual real-life adult politicians are mourning Big Ben falling silent

MPs are holding a vigil for a big bell.

Democracy in action in the Mother of Parliaments has always been a breathtaking spectacle, and today is no exception. For a group of our elected representatives, the lawmakers, the mouthpieces for the needy, vulnerable and voiceless among us, will be holding a silent vigil, heads bowed, for the stopping of Big Ben’s bongs for four years.

That’s right. Our politicians are mourning an old bell that won’t chime for a limited period.

Here’s everything ludicrous they’ve been saying about it:

“Of course we want to ensure people’s safety at work but it can’t be right for Big Ben to be silent for four years.

“And I hope that the speaker, as the chairman of the House of Commons commission, will look into this urgently so that we can ensure that we can continue to hear Big Ben through those four years.”

- The Right Honourable Theresa May MP, Prime Minister of the United Kingdom of Great Britain and Northern Ireland, head of Her Majesty’s Government.

“There’s going to be a small group of us standing there with bowed heads in the courtyard… a group of like-minded traditionalists.

“We’re going to be gathering outside the members’ entrance, gazing up at this noble, glorious edifice, listening to the sounds rolling across Westminster, summoning true democrats to the Palace of Westminster.

“We’ll be stood down there with heads bowed but hope in our hearts.”

- Stephen Pound, Labour MP for Ealing North, Shadow Minister for Northern Ireland Where There Are Actual Issues.

“Why can’t they switch the bells back on when they stop working at 5pm or 6pm or whenever it is? Also why is it taking four years?… My own view is that Big Ben, whether it be the Elizabeth Tower or indeed the bell inside, it’s not just one of the most iconic British things, it’s one of the most iconic world things, it’s on a Unesco site.”

- Nigel Evans, Conservative MP for the Ribble Valley and Adult Human Person.

“Four years to repair Big Ben?! We could have left the EU twice in that time.”

- The Right Honourable Lord Adonis, formerly of the No 10 Policy Unit and ex-Secretary of State for Transport.

“I think Big Ben ought to be kept striking as much as possible during the repairs as long as it doesn’t deafen the work force.

“It would be symbolically uplifting for it to sound out our departure from the EU as a literally ringing endorsement of democracy.”

 - The Honourable Jacob Rees-Mogg, Conservative MP for North East Somerset and Our Future Overlord.

“We are being liberated from the European Union superstate and Britain will again be a completely self-governing country. Where will the eyes of the world be? On Parliament and Big Ben. It would be very strange if at midnight on that day it does not chime out, very bizarre. It is the heart of our nation.”

 - Peter Bone, Conservative MP for the Unfortunate Doomed of Wellingborough. 

Others have responded:

“[Silencing the bell is] not a national disaster or catastrophe.”

- The Right Honourable Jeremy Corbyn MP, Leader of Her Majesty’s Most Loyal Opposition (to broken clocks).

“When you see the footage [on Monday] of our colleagues who gather at the foot of Big Ben you will not see too many colleagues who have careers ahead of them.”

- Conor Burns (by name and by nature), Conservative MP for Bournemouth West and Parliamentary Private Secretary to the Foreign Secretary.

“I think we should respect people’s health and safety while we’re at work.

“To be honest, there are more important things to be worrying about. We’ve got Grenfell Tower, we’ve got thousands of people across our country let down who don’t get access to proper mental health care, and so on and so forth.

“Quite apart from what’s happened in Barcelona, let’s just get a life and realise there are more important things around.”

- The Right Honourable Norman Lamb, Liberal Democrat MP for North Norfolk, former Health Minister, and National Voice of Reason 2017.

I'm a mole, innit.