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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Copeland must be Labour's final warning

Unison's general secretary says Jeremy Corbyn is a friend - but must also take responsibility for turning the party's prospects around. 

No one objective could argue that last night’s by-election results were good for Labour.

Whilst it was undoubtedly pleasing to see serial fibber Paul Nuttall and his Trumpian politics put in their place in Stoke, this was never a seat where the result should have been in doubt. 

But to lose Copeland – held by Labour for 83 years – to a party that has inflicted seven years of painful spending cuts on our country, and is damaging the NHS, is disastrous.

Last autumn, I said that Labour had never been farther from government in my lifetime. Five months on the party hasn’t moved an inch closer to Downing Street.

These results do not imply a party headed for victory. Copeland is indicative of a party sliding towards irrelevance. Worse still, Labour faces an irrelevance felt most keenly by those it was founded to represent.

There will be those who seek to place sole blame for this calamity at the door of Jeremy Corbyn. They would be wrong to do so. 

The problems that Labour has in working-class communities across the country did not start with Corbyn’s leadership. They have existed for decades, with successive governments failing to support them or even hear their calls for change. Now these communities are increasingly finding outlets for their understandable discontent.

During the 2015 election, I knocked on doors on a large council estate in Edmonton – similar to the one I grew up on. Most people were surprised to see us. The last time they’d seen Labour canvassers was back in 1997. Perhaps less surprisingly, the most common response was why would any of them bother voting Labour.

As a party we have forgotten our roots, and have arrogantly assumed that our core support would stay loyal because it has nowhere else to go. The party is now paying the price for that complacency. It can no longer ignore what it’s being told on the doorstep, in workplaces, at ballot boxes and in opinion polls.

Unison backed Corbyn in two successive leadership elections because our members believed – and I believe – he can offer a meaningful and positive change in our politics, challenging the austerity that has ravaged our public services. He is a friend of mine, and a friend of our union. He has our support, because his agenda is our agenda.

Yet friendship and support should never stand in the way of candour. True friends don’t let friends lose lifelong Labour seats and pretend everything is OK. Corbyn is the leader of the Labour party, so while he should not be held solely responsible for Labour’s downturn, he must now take responsibility for turning things around.

That means working with the best talents from across the party to rebuild Labour in our communities and in Parliament. That means striving for real unity – not just the absence of open dissent. That means less debate about rule changes and more action on real changes in our economy and our society.

Our public servants and public services need an end to spending cuts, a change that can only be delivered by a Labour government. 

For too many in the Labour party the aim is to win the debate and seize the perceived moral high ground – none of which appears to be winning the party public support. 

But elections aren’t won by telling people they’re ignorant, muddle-headed or naive. Those at the sharp end – in particular the millions of public service employees losing their jobs or facing repeated real-terms pay cuts – cannot afford for the party to be so aloof.

Because if you’re a homecare worker earning less than the minimum wage with no respite in sight, you need an end to austerity and a Labour government.

If you’re a nurse working in a hospital that’s constantly trying to do more with less, you need an end to austerity and a Labour government.

And if you’re a teaching assistant, social worker or local government administrator you desperately need an end to austerity, and an end to this divisive government.

That can only happen through a Labour party that’s winning elections. That has always been the position of the union movement, and the Labour party as its parliamentary wing. 

While there are many ways in which we can change society and our communities for the better, the only way to make lasting change is to win elections, and seize power for working people.

That is, and must always be, the Labour party’s cause. Let Copeland be our final warning, not the latest signpost on the road to decline.

Dave Prentis is Unison's general secretary.