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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Don't bet on James Brokenshire saving devolution in Northern Ireland

The Northern Ireland secretary's decision to extend talks makes a settlement less, not more, likely. 

The deadline for the parties at Stormont to form a new executive has passed without an agreement. Northern Ireland secretary James Brokenshire has – as was inevitable – taken the least difficult option and opened a “short window of opportunity to resolve outstanding issues”.

Talks have been extended for a “short few weeks” – Brokenshire’s interpretation of the “reasonable period” allowed after the initial three weeks after the election elapsed. Despite his earlier warnings, there will be no snap election (for which he conceded there was “no appetite”).

Unhelpful though the tortured semantics of “a short few weeks” are, we can assume that new negotiations may well as last as long as the impending Commons recess, which begins on Thursday and ends on April 11th – after which, Brokenshire said, he will bring forward legislation to set regional rates in the absence of an executive. This, though not quite direct rule, would be the first step in that direction.  

So what changes now? Politically speaking and in the immediate term, not a great deal. For all the excited and frankly wishful chatter about the two parties approaching the final talks afresh after Martin McGuinness’ funeral last week, Sinn Fein and the DUP remain poles apart.  

The former declared talks to have failed a full day before the deadline, and Sinn Fein president Gerry Adams has since said there has been “no substantive progress” on the key issues at hand – particularly the DUP’s “minimalist” approach on the Irish language and marriage equality. Seemingly unassailable differences remain on a new Bill of Rights and measures to deal with the legacy of the Troubles. As such, both Adams and Sinn Fein's new leader Michelle O’Neill continue to stress their election lines: equality, respect, integrity, and, perhaps most tellingly, “no return to the status quo”.

Brokenshire clearly recognises that there will be no new executive without some movement on these issues: yesterday he referred to the talks to come as an “opportunity to resolve outstanding issues”. He is right to do so: Sinn Fein’s demands are, for the most part, as yet unimplemented provisions from the Stormont House and Fresh Start Agreements of 2014 and 2015. 

But will the DUP budge? It appears unlikely at first glance. Sinn Fein’s approach to negotiations has only heightened tensions between the would-be coalition partners, whose relationship has regressed to the openly adversarial (DUP leader Arlene Foster yesterday expressly blamed Sinn Fein for the collapse in talks).

There looks to be little appetite for compromise on Sinn Fein’s headline demands. The DUP’s opposition to historical prosecutions of Troubles veterans is well-publicised, and appears to be aligned with UK government thinking.

Nor does there appear to have been any real shift in the party’s position on legal recognition for the Irish language. Speaking on the BBC’s World at One yesterday afternoon, Ian Paisley Jr stressed in pretty woolly terms to the DUP’s commitment to “promoting minority languages”, which, however true, is not the commitment to an Irish language act that Sinn Fein are asking for. That the spirit of Paisley’s remarks was essentially the same as his leader’s contrarian take on the issue – she said, provocatively, that there was much a need for a Polish language act as an Irish language act – is not a promising sign.

The continuing fallout from the Renewable Heat Incentive scandal that triggered last month’s election also complicates matters. Though the London press have already relegated this public spending scandal to the footnotes, the full ramifications are yet to be seen. A full list of claimants was last week published by the Belfast News Letter, and the longer the process of negotiation and renegotiation drags on, the clearer the answer to the question of who exactly benefited from the scheme’s mismanagement becomes. Though, Foster's penance in the wake of the DUP’s calamitous election performance has gone some way to rehabilitating her public image, the taint of corruption could retoxify the brand. It isn’t difficult to see why veteran Stormont horse-traders like Reg Empey, the former leader of the UUP, believe an executive may well be unachievable until the inquiry into "cash for ash" delivers its ruling – a process which could take a year.

The political impasse, then, looks as insoluble as ever. Leaders of smaller parties such as the non-sectarian Alliance have blamed Brokenshire for the startling fact that there were no roundtable talks at any point during the past three weeks. The Northern Ireland secretary’s decision to extend talks for another fortnight could bury power-sharing as we know it for good. From Wednesday, the civil service will take control of the province’s budget, as per Section 59 of the Northern Ireland Act. The permanent secretary of the Department for Finance will immediately have access to just 75 per cent of available funds, and, if the situation persists, 95 per cent.

In the worst case scenario, this means cuts could well come hard and fast. All the better for Sinn Fein - as I wrote earlier this month, the imposition of austerity and Brexit from London offers an opportunity to parlay short-term pain into long-term political gain. Meanwhile, Brexit secretary David Davis has admitted that Northern Ireland would automatically rejoin the EU in the event of a border poll. The path to a united Ireland via direct rule looks clearer than ever before.

Unionists are not blind to this existential risk – and here Brokenshire’s bizarre insistence that he was ready to call Northern Ireland’s third election in twelve months exposes his political naivety. He maintains there is “little public appetite” for a new poll. He might be right here, but that doesn’t mean a revanchist DUP would refuse the opportunity, if it arose, to go back to a unionist electorate it believes have taken frit at Sinn Fein’s post-election manoeuvring. Some in the party are keen to do so, if only to put to bed what they deem to be premature and melodramatic talk of imminent Irish unity.

Another election would suit Sinn Fein’s long game. The more dysfunctional and unworkable devolved politics in the North, the stronger the logic for a quick transition to a united Ireland in the EU. Much of the Northern Irish political establishment deem Brokenshire a lightweight - as do many in his own party. That he seems not to have realised that threatening a new election wasn’t much of a threat at all – or foreseen this avoidable mess - does nothing to dispel that notion. 

Patrick Maguire writes about politics and is the 2016 winner of the Anthony Howard Award.