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

Macroeconomist, bond trader and author of Money

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

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Cabinet audit: what does the appointment of Andrea Leadsom as Environment Secretary mean for policy?

The political and policy-based implications of the new Secretary of State for Environment, Food and Rural Affairs.

A little over a week into Andrea Leadsom’s new role as Secretary of State for Environment, Food and Rural Affairs (Defra), and senior industry figures are already questioning her credentials. A growing list of campaigners have called for her resignation, and even the Cabinet Office implied that her department's responsibilities will be downgraded.

So far, so bad.

The appointment would appear to be something of a consolation prize, coming just days after Leadsom pulled out of the Conservative leadership race and allowed Theresa May to enter No 10 unopposed.

Yet while Leadsom may have been able to twist the truth on her CV in the City, no amount of tampering will improve the agriculture-related side to her record: one barely exists. In fact, recent statements made on the subject have only added to her reputation for vacuous opinion: “It would make so much more sense if those with the big fields do the sheep, and those with the hill farms do the butterflies,” she told an audience assembled for a referendum debate. No matter the livelihoods of thousands of the UK’s hilltop sheep farmers, then? No need for butterflies outside of national parks?

Normally such a lack of experience is unsurprising. The department has gained a reputation as something of a ministerial backwater; a useful place to send problematic colleagues for some sobering time-out.

But these are not normal times.

As Brexit negotiations unfold, Defra will be central to establishing new, domestic policies for UK food and farming; sectors worth around £108bn to the economy and responsible for employing one in eight of the population.

In this context, Leadsom’s appointment seems, at best, a misguided attempt to make the architects of Brexit either live up to their promises or be seen to fail in the attempt.

At worst, May might actually think she is a good fit for the job. Leadsom’s one, water-tight credential – her commitment to opposing restraints on industry – certainly has its upsides for a Prime Minister in need of an alternative to the EU’s Common Agricultural Policy (CAP); a policy responsible for around 40 per cent the entire EU budget.

Why not leave such a daunting task in the hands of someone with an instinct for “abolishing” subsidies  thus freeing up money to spend elsewhere?

As with most things to do with the EU, CAP has some major cons and some equally compelling pros. Take the fact that 80 per cent of CAP aid is paid out to the richest 25 per cent of farmers (most of whom are either landed gentry or vast, industrialised, mega-farmers). But then offset this against the provision of vital lifelines for some of the UK’s most conscientious, local and insecure of food producers.

The NFU told the New Statesman that there are many issues in need of urgent attention; from an improved Basic Payment Scheme, to guarantees for agri-environment funding, and a commitment to the 25-year TB eradication strategy. But that they also hope, above all, “that Mrs Leadsom will champion British food and farming. Our industry has a great story to tell”.

The construction of a new domestic agricultural policy is a once-in-a-generation opportunity for Britain to truly decide where its priorities for food and environment lie, as well as to which kind of farmers (as well as which countries) it wants to delegate their delivery.

In the context of so much uncertainty and such great opportunity, Leadsom has a tough job ahead of her. And no amount of “speaking as a mother” will change that.

India Bourke is the New Statesman's editorial assistant.