There already have been two or three enquiries by outside experts into the things that went wrong in Ireland between 2000 and 2008, that led to the banking crisis.

Now that ground is being traversed again by a Committee of elected politicians.

What extra value can this Oireachtas Enquiry add to what has been found by the expert enquiries?

The crucial job to be done by the Oireachtas Enquiry is to discover whether, since 2008 and the completion of the earlier expert enquiries, the Irish state and the EU, have done enough to prevent this sort of banking crisis happening here again.

Some may think a similar property led banking crisis is most unlikely. They assume everyone has learned the lesson, and that the memory of 2008 will stay fresh for decades to come .I am not so sure.

LOW INTEREST RATES, AND FEW INVESTMENT OPPORTUNITIES, MAY LEAD TO ANOTHER PROPERTY BUBBLE

A recent paper by Larry Summers for the US National Institute of Business Economics suggests that we may be in for a very long period of low interest rates on a global basis, with few opportunities for productive investment.
If that proves to be the case, the temptation for that cheap money again to  seek returns by speculatively lending to buy an interest in property, in the hope of a capital gain, will be very strong.

NOT EASY TO APPLY BRAKES DURING A BOOM

In the middle of a property led boom, it is always very hard to put on the brakes, because
so many people would lose if the boom stopped. This is because, if enough people have borrowed money on the basis of an assumption that property prices will continually rise, they will go bust if property prices stop rising. 

These borrowers will punish the politician or institution who stops the party.
In such circumstances, everyone ( including regulators) may prefer to leave the blowing of the whistle, and the blame taking for the resultant property price decline, to someone else.

A similar problem would arise for a government that decided to take the heat out of the credit and property market, by running an extra large surplus of taxation over spending, and paying down debt, instead of giving in to spending demands.


How could such a government get away with running an extra large budget surplus, which it automatically should have in a boom, if there is one family without a house , one patient untreated by the health services, or  one pay demand unmet?


Anyone who urged the  government  to do that would be shouted down, by the very people who would subsequently condemn that government for letting the bubble develop. 

STRONG INSTITUTIONS NEEDED TO LEAN AGAINST THE WIND

That mentality can only be changed by the creation of strong and respected institutions that will lean against the wind of public opinion during a boom. If that does not happen,will have another banking crisis. 

I do not believe we have such institutions in place yet. Even the new European Single Supervisory Mechanism for banks will be subject to political pressures from member states. The recommendations of the European Commission in favour of fiscal prudence are being undermined by some governments, and much economic commentary.

THOSE WHO GIVE BAD NEWS SOMETIMES PUT THEIR CAREERS AT RISK

In the pre crisis years in Ireland, the same intolerance of dissent existed within the banks themselves, and within the in the institutions supervising the banks. 

One of the authors of one of the expert reports, Dr. Nyberg found that, in Ireland in pre crash period,


“A minority of people indicated that contrarian views were both difficult to maintain during the long boom and unhealthy to present to boards or superiors. A number of people stated that had they implemented or consistently supported contrarian policies they may ultimately have lost their jobs, positions, or reputations. Other signs were also noted pointing to sanctioning of diverging or contrarian opinions as well as self-censorship because of this. The apparent strength of these expected sanctions is difficult to judge, but the absence of opposition, barring only handful of identified vociferous contrarians, may have made it easier for institutions to accept toning down the application of vital, tried and traditional prudential practices.”



Will that be any different the next time?



The Oireachtas Banking Enquiry needs to ask itself what has been changed since 2008 the ensure that this sort of conformist response to a new bubble would not recur  in political parties, in the media, in the economics profession, in the Department of Finance, and in the banks in Ireland.

In other words, has Irish human nature, or Irish culture, changed sufficiently as a result of the experience of 2008, or, if it has not, have new institutional structures been put in place to safeguard against these weaknesses of human nature and culture.
BLAMING INDIVIDUALS WOULD BE EASY, DEVISING PREVENTIVE INSTITUTIONS, MUCH HARDER

These are exceptionally difficult questions to answer, but they are the questions that matter.

The danger is that the Enquiry, instead of asking these really difficult questions, will find itself pushed in the direction of scapegoating individuals for mistakes made. This would make better theatre, and some of the media comment already shows an inclination to follow this criterion in judging the Enquiry.

It is also important to look at the macroeconomic forces that led to the Irish property bubble.

AN INFINITE AMOUNT OF CREDIT, BIDDING UP THE PRICE OF A FINITE AMOUNT OF LAND, IS A RECIPE FOR DISASTER

In the years before the crash there was an almost infinite amount of credit on offer to buy into a commodity, that was in inherently limited supply, land on which property could be built. 

A situation like this will always be volatile.

If the unlimited credit was, instead, going into producing new products or new services, for which (unlike land) the market was not inherently limited, there would be a less volatile situation.
But such opportunities may be hard to find. Technology may be making it more difficult.

As Larry Summers points out 

“it used to require tens of millions of dollars to start a significant new venture, but significant venture can be seeded with tens of thousands of dollars”. 

This is because the big new ventures today are in software, which does not require big capital spending, whereas the big breakthroughs on the past were in the motor industry, steel, or aviation, which required huge amounts of capital. 

If so, this would increase the risk that all the cheap money now being pumped into the system by the Central Banks to revive the economy, will find its way into another property bubble, because it will have nowhere else to go.

PROPERTY LENDING SHOULD HAVE A HIGHER RISK RATING ON BANK BALANCE SHEETS

Perhaps a higher risk rating should therefore be placed on that portion of a loan that reflects the value of the site on which a property is built, because site values are more volatile, and more subject to speculative pressures up and down, than any other subject of bank lending.

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