Gregory Connor Transcript

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Welcome to the Dublin City Public Libraries and Archive Podcast. In this episode Gregory Connor, Professor of Finance at NUI, Maynooth, talks about the effect of Ireland joining the Euro, and how things may have worked out differently if our banking regulatory system had been stricter. He also addresses the housing situation, mortgage arrears and how Ireland might get out of debt. This talk, one of a series on the Irish Economy, was recorded in front of a live audience at the Central Library in March 2012.

Great thanks so much Padraic, thanks for having me, I hope you all get something from this talk and thanks for coming, so I really wanted to cover three things here.  I want to talk about the Eurozone that’s the currency we are in, along with 16 other European countries not including the UK and as you know it’s in a bit of a crisis at the moment, so I’ll talk about the Eurozone, what’s wrong with it, how the crisis evolved, then I’m going to talk in particular most of what I want to talk about is the Irish situation in particular, how the Irish banks got Ireland into so much trouble and where things stand at the moment from the perspective of Ireland in the Eurozone crisis and then last thing I’ll talk about the future, is Ireland and is the Eurozone on a path to get out of this and what are the likely outcomes I’ll just briefly discuss on that. 

So I want to start with a picture of John Kenneth Galbraith, he’s a late 20th Century witty Canadian American economist.  Actually coming back into favour now, but he talked a lot about fads, social fads and the influence of social delusions and business fads on the economy and he did a lot of work in particular about how the 1920’s, roaring 20’s led to the Great Depression and it has a lot of resonance now in fact in what happened in the noughties as they call it, the 2000, the 2008 period and how that led to the current crisis, but in particular as I said he was quite witty, one of his witticisms was “The great thing about being an economist is the more you screw up the more they need you” and it’s true the last few years as an economist, you get more and more attention to what you are saying, whereas people always ignored you during the noughties.  All of a sudden we are very stylish in giving talks like this okay which is a bad thing okay and maybe that needs to go away.  I want to lay my cards on the table and say I’m not one of the economists who’s going to come in here and say I told you this would happen, I missed it okay, I screwed up, in fact I do risk modelling, financial risk modelling so I just say, I am not one of the people who can claim I saw it coming.  What I say about the past is with hindsight and I don’t want to pretend otherwise.

Okay so first I want to talk about the Euro, okay the Euro is this currency zone, now in seventeen countries which is a locked in set of exchange rates where these basically all the countries are in the same currency and as you know it’s causing enormous dislocation problems in many of the countries, really throughout the zone from Germany to Portugal the Euro is problematic.  Why did we do it? What was the reason for the Euro?  Okay, let’s look in particular the financial reasons, because there are successes associated with the Euro.  This is one of the big reasons for the Euro and if you understand this graph, you will understand not only the reasons for the Euro or one of the reasons for the Euro but the problems in the Euro.  This is the relationship between the Italian Lira and the German Deutschmark from 1980 till 2009, throughout that period Italy, the Central Bank in Italy and the Italian Government had one goal with their exchange rate policy, this graph was not to slope downwards, okay that was their goal that was their overriding goal.  This line was to be straight okay and that was what they tried to do for 20 years, did they succeed, no they failed and they failed and they failed and they failed and they failed.  It just went, it continued to slope down for 20 years as they fought and fought and fought to keep it strong, to keep the Lira strong, a hard money policy and they just couldn’t do it okay.  The political system just didn’t allow them to do it.  The Union said ah we know they are not credible, we know they are going to relax the exchange rate, so we are going to bid up our wages okay, because we know they won’t go through with it.  The pensioners as well said we need more pension money because we know they are going to, they are going to inflate away any gains, everyone the political system, everything worked against what was their key motivation and it failed, except at the end, once they locked into the Euro it worked, okay all of a sudden Italy had a hard currency, note at the end once it’s in the Euro, because they are the same currency as Germany, they now have a hard currency relevant to Germany, so in fact there’s a success, Italy now has a hard currency, as does Ireland, as does Portugal, as does Belgium and even France because France had the same desire and the same though not as dramatic the same failure throughout this period.  So all these currencies which wanted hard money now have hard money okay so there’s your success, now there are other issues of course.  There’s the issue of trade and the no need to exchange currency as you move across borders, but this is really from the financial side, the key motivation for the Euro and in a sense it worked, we got what we asked for, okay but many people see why did it have to be such a brittle system?  Why did this Euro system have to be so inflexible and brittle, that was not a bug in the Euro design, that was a feature you know the term, the joke that programmers say, when you say there’s a bug in your programme, your computer programme that’s not a bug it’s a feature okay, that’s true of the Euro.  Its brittleness was intended, it’s a feature of the Euro that it’s brittle, okay that was how the Italian State was able to lock in a hard currency by forcing the system so that it cannot leave.  If the Euro were a system where Italy could be in the Euro but it can leave any time it would never have had a hard currency, it would have lasted three months and then the demands of the system for a soft currency would have overwhelmed it, so the locking in is part of the success of the Euro, and this is actually a very old strategy.  This is a third century mosaic and that is Odysseus and if you remember the story of Odysseus what does he do, he locks himself onto the ship’s mast and I have a quote here about this is from Homer’s Odyssey okay, okay it says this is Circe telling Odysseus how he can listen to the siren’s, the siren’s are these lovely singing magical creatures on two sides of the straight and they are sailing through the straight and anyone who hears the sirens is so enchanted by the beautiful singing that they are drawn off the straight and narrow path and into the rocks okay so what does Odysseus do?  “He must drive straight on past but melt down sweet wax and honey and with it stuff your committed companions ears so none can listen, the rest that is but if you yourself are wanting to hear them, then have them tie you hand and foot on the fast ship standing upright against the mast with the ropes ends lashed around it, so that you can have joy in hearing the song and the sirens but if you suffocate your men and implore them to set you free, then they must tie you fast and even more lashings.”  This worked too okay.  Odysseus got to hear the sirens and he sailed safely through the straights by locking himself onto the mast okay and that’s what we’ve done, we now have a hard currency, so does Greece, so does Italy.  We didn’t matter in that sense but Italy mattered and France mattered, so one of the key motivations is to lock in, create a brittle currency system where we have to have a hard currency system okay. 

This was not really the key issue for Ireland.  For Ireland why did Ireland go along?  Well Ireland was very I’m sorry where’s Ireland, okay I want to talk about Germany, then I’ll talk about Ireland, what about Germany?  Why did Germany go along with such a system?  Okay well you probably remember Fawlty Towers, there’s a running joke on Fawlty Towers, they have German guests come in and Basil Fawlty would say don’t talk about the war okay, don’t talk about the war with the Germans and then of course you would end up talking about the war because he would put his foot in his mouth okay.  Well I worked in the city in the late nineties, in the city of London and I used to visit clients, I was selling risk management systems okay, and I’d visit clients and client support would always whisper to me, don’t talk about the Euro as a problem, they are German clients, don’t talk about problems with the Euro, so I’d stand up here and I’d have to make sure I didn’t say anything negative about the Euro, because the Germans just had this emotional commitment.  It was really the same thing, it was basically liberal anti-nationalism, the Germans just felt we are good Europeans, we want everyone to be one body, so it’s actually a good thing, but it did make them blind okay, the Belgian’s, the German’s, the Dutch, the hard currency countries were blind to the failures of the Euro, why?  Basically for good motivation they believed partly it’s not the whole story but partly, they believed in liberal anti-nationalism, they wanted to take the hard currency, the Deutschmark and share it okay to bring Europe together, so the German’s are partly to blame but partly their blindness was in a sense motivated positively to a good extent okay, so there isn’t really just goodies and baddies, there’s blindness for good motivation, okay that’s another thing that happened.  They certainly were blind, the Germans allowed Greece into the Eurozone.  Now looking back at that, that was a ridiculous decision, again with hindsight the idea that Greece, Italy coming in is marginal and it seemed to possibly work, but Greece coming in was clearly you know grossly in error, so they clearly were blinded okay by something okay. 

What about the Irish?  Well the Irish didn’t really matter okay they didn’t matter much but they were welcome okay Ireland was welcomed, why did the Irish join?  Well it wasn’t so much the hard currency, Ireland did not have the same experience as Italy with a constant depreciation of its currency, it didn’t manage in many cases to keep a peg for instance to the British Pound but Ireland was also enthusiastic.  Most financial economists in Ireland and it was basically because they saw it as the chance to lower their cost of investment.  This is their cost of investment under a small more peripheral currency like the Punt.  Joining a big currency area like the Euro okay was going to lower the cost of investment and that was going to increase investment.  This was what many Irish economists, myself among them and someone who is at this point interested in visiting Ireland okay, this is what we believe, we are going to lower our cost of investment and increase investment because the cost of the funds was going to decline when we move from being a small peripheral currency with all the risk associated with that, to a member of a big currency block okay locked in at hard currency rates.  What did we get?  Well something worse, something that we didn’t really predict which was over investment a credit flood okay, Ireland got a credit flood.  In fact looking back we realised there was so much investment for bad reasons, bad business decisions, bad regulatory decisions, that in fact many of the investments were negative in their returns, so we were actually getting, we were throwing money at investment projects okay with negative return.  When I see we there, that’s the business interests and the business community in particular the banks and property developers together, were taking German money and poor money and throwing it away because of self managerial, self interest okay. 

I’m going to look in a little more detail what happened in Ireland but basically this is the key thing, it was essentially a credit flood, we had a flood of foreign credit when we joined this big currency zone and had bad financial regulation, okay let’s look now in more detail of Ireland, sort of work out the steps of where this, how this affected our banks and one in particular happened.  This is the asset side of the Irish banking system, keep in mind with banks assets and liabilities, it’s like my right side is your left side, the same with banks, their assets side is your liability side, so you have mortgages you think on them as liabilities, for a bank mortgages are assets.  Credit card debt we think of them as liabilities, those are assets to banks.  You might have a savings account, to a bank that’s a liability, but that’s an asset to you.  You might have a checking account that’s your asset, their liability, so this is their asset side business and individual’s liability side and let’s look at what happened to these banks.  The red bar is the key thing here, this is property development.  In traditional commercial banking it should be zero.  Property development is not considered an appropriate activity for a commercial banks, they are only supposed to lend for property in the traditional view, where they already have the red one locked in, so short term last minute banking otherwise it’s supposed to be equity.  And what we can see is that exploded over the noughties period, so the red part just grew enormously okay, so on the asset side you had a big growth of property development which is in fact not even an appropriate activity for banks and as we now know there was some very bad investment decisions.  There was also a lot of growth of mortgages okay, so on the asset side way too much property development growth and also quite strong, probably too strong growth in mortgages.  What about on the liability side?  Where was the money coming from?  It was coming from foreign borrowing, the banks were paying for these very risky investments by borrowing from foreign mostly Eurozone banks okay, so they were taking short term money from foreign banks and using it for very speculative investment so this is if you follow kind of you know the entrails of what happened in the crisis this is a little bit old news but that’s the key thing and here again this red area is the key one along with the yellow one this is foreign borrowing okay.  Now the yellow one is a little bit less bad because it is not coming out of, it’s all going into foreign lending okay, whereas red is actual foreign borrowing being used recycled back into the domestic lending.  Note this borrowing is what’s called “Hot Money”, these are quickly reversed okay and note here you can see it climbing down, this is the hot money drifting out of Ireland okay.  A lot of these are very short term institutional deposits and short term bonds that the foreign banks can you know liquidate at their pleasure okay. 

Well what we do in economics, to look at policy and sort of understand what went wrong is what’s called counter factual policy analysis.  What we do and you know a standard tool is we take a decision in the past and we want to think about was that a good decision or a bad decision, what were the implications of it, we remove it and then we create a new history.  We say let’s change an old decision and let’s see how key it was because we know how the decision feeds through the system, let’s change that decision and see what the system would look like okay.  It’s just like, I like the picture of Gwyneth Paltrow Sliding Doors okay, that is basically the same idea.  There’s this movie where Gwyneth Paltrow is running onto a train and in one reality she makes it onto the train okay and then she gets home and she finds her boyfriend cheating on her with another girl and her life goes one way, okay and the other reality she hesitates and misses her train and her life goes another way okay well that’s basically counterfactual simulations.  Now I’m going to do that for a minute this was work with Brian O’Kelly on the Irish banks.  What would have happened if we had been slightly more sensible in financial regulation during the bubble period okay, well in fact with a little bit of a change in bank regulation okay most of the Irish problems would have gone away okay.  Most of the crash would have gone away and thinking through that reality, so now we are in a different reality, we are in a made up reality, where the Irish Central Bank and the Irish Financial Regulator prevented the banking sector from taking these extremely risky bets on property development funding by net foreign borrowing okay.  Just make them more sensible, reasonable regulation it’s called prudent regulation, that little change would have really changed the outcome okay, so here’s the asset side when we enforce the condition that property development cannot be more than ten per cent of stable liabilities which are domestic deposits which are on the other side okay.  So you can only have ten per cent property development assets relative to domestic deposits okay and we also put in the condition a note you change the, you drastically reduce this scary red part okay, which caused the problems on the asset side.  We do the same thing on the liability side here we forced the net foreign borrowing to be cut.  Again this should have been controlled by the financial regulator and it wasn’t, so let’s control it okay, so this is our simulated reality which is allowing the system to be more prudent in its behaviour okay and those things go away, what would happen to the Irish economy?  Well you would have much, you know obviously by construction you would come into the 2008 Lehman Brothers cut crash with a much more stable banking system, so you are coming along here, here’s the crash, the system is much more stable, than in that reality in terms of your exposures to property risk and for hot money foreign borrowing okay, you would also have a more stable borrowing okay.  This is the borrowing side, so here we have our net foreign borrowing, the GDP that’s both on the asset and liability side a much more stable environment okay.  It actually would have after the 2008 crash eliminated a lot of the ... we would be just like most other European countries with just a little bit of a change in our financial regulation, you will see this has implications as we think about whose fault it is and what needs to go, happen going forward okay.  With this obviously there would be a big change in net foreign borrowing right, by construction, so we wouldn’t have this big overhang that the banks all of a sudden as you remember in September 2008 the banks all went bust, they effectively all went bust, because all that “Hot Money” all that net foreign borrowing left and the Government was how are we going to replace it?  Well first it put in the guarantee, that didn’t work and then it went into an IMF Programme okay, because it had to replace all that “Hot Money” which disappeared in a flash okay.  But here’s the interesting thing, it wouldn’t have been such a lovely period for you all okay, you remember those years they were wonderful growth years, why were they wonderful growth years?  For false reasons, it was fake income okay, it was generated by imprudent borrowing of the domestic banks from foreign banks, so all that wonderful 2003 to 2007 growth was phony okay and if we eliminate, if we bring in prudent regulation a whole lot of growth disappears okay, so in a sense this was already spent okay and now we have to in a sense pay it back and that’s where the ECB, that’s where the you know European Commission and even IMF were telling us you already had the good times, now you have to pay the cost okay, that’s one way to interpret it.  Right in fact if we look here this is your GDP, there’s your extra GDP you got by having bad decisions.  Note it’s only negative at the end okay obviously you continue here, it’s got to in a sense if you believe in you know a just universe, all of this has to be balanced on the negative side right, that would be the Greek tragedy solution right.  If Homer did this, that would all go away so we would pay it all back right.  In fact here it is just graphically, there’s Ireland if we would have done things right.  Now again this is a simulated reality and what do we see in the purple line, this purple line here is Ireland without imprudent banking regulation which allows this credit inflow right, a lot less growth and in fact you know it’s sort of you are losing more than you are benefitting so far, so obviously this has to continue for quite a while, right this yellow line to make it equal because the yellow is the reality, the purple is the simulated reality.  Well if you are going to get rid of all that growth, that fake growth, you know it’s going to be paid back and it clearly is right because something you know, we are in a sense going to pay all that back one way or the other okay.

So that’s sort of a review of the Euro, a little bit about Ireland, now I want to just for my last little bit, I want to talk about the future and where things stand and what it looks like going forward okay, well we had this big party really.  Right Ireland had a party based on phony money that was poured in via the Euro currency from foreign banks okay.  Now we have to pay it back or some feel we don’t have to but the standard view at least by the ECB and the IMF is we do have to pay it back.  Can we pay it back?  Is it feasible?  That’s the question, well this is the key number okay which is Government debt relative to GDP, if this number is more than about 120 per cent, so you have more debt than you have national income right, annual national income most people feel it can never be paid back.  The reason is what happens it grows with interest and your income doesn’t grow and you can never get to equilibrium, you can never get out of debt, you can never get yourself out of debt as a country.  Okay so above 120 it’s normally considered not feasible and you can see well Ireland are just about hopefully maybe going to miss that, right we will look at some of the other detail.  This is just a generated problem, note this is not the original problem, this debt is generated by poor bank regulation okay, it was not even high when we started back here in 2008 when the problem started the debt wasn’t even high, so this is all coming out of bad decisions in our banking system okay. 

Let’s look at the banking system it’s just another big problem, when all the net foreign borrowing disappeared it had to be replaced, it had to be paid off with cash.  Banks don’t have cash, a lot of people think when you give cash into a bank, they put it in a big you know drawer in the back, that’s not what happens, the cash goes out immediately.  You put money into your savings account, the next day or the same day they paid it out into someone’s mortgage okay, your savings account isn’t in the bank, it’s in a mortgage okay, so what happened when all these foreign banks say oh give us our money back, they didn’t have any money, in fact their assets were collapsing at the same time right.  They had to get money as extraordinary liquidity support from the Central Banks, that’s one of the roles in the Central Bank, it provides liquidity when banks assets are illiquid okay and an enormous amount right, Irish banks have like 110 billion Euro’s of this emergency liquidity support both from the European Central Bank and in the case where the assets aren’t good enough for the European Central Bank from the Irish Central Bank, okay so these are the assets which aren’t even good enough quality for the ECB to accept them, right and that has to be changed.  That’s supposed to be quote “short term”, that’s supposed to be the Central Bank providing short term liquidity, well it’s already been five years, how many more years is it going to be right, probably five or six.  These are backed by assets, right these are backed by mortgages, property development assets, business loans but they are illiquid right and some of them are of dodgy value, so this is a big problem too.  It isn’t just the Government debt, it’s also the banking system becoming liquid again okay, somehow getting rid of this overhang of emergency liquidity support right.  How can it do that?  Well it’s pretty hard it has to shrink, it has to shrink its asset size to generate cash as people pay off their mortgages and business loans it has to use the funds to pay off this big overhang, to remove this big overhand of emergency liquidity support from the ECB and that’s a really slow process.  You can see here look at how slowly the assets are declining, even though this red line is the stock, the flow of new lending is shrinking drastically, but the stock of outstanding lending is only very slowly inching down and of course it builds on itself as they shrink lending the economy contracts and that feeds back into itself, because of the whole sector you get this aggregate affect.  If they all try to shrink, all that happens with the economy shrinks and it’s very hard for them, so it’s really difficult, there is a difficult problem, so I’m not claiming things are easy here okay, obviously property prices which bubbled up have also you know gone down and that hits banks, right now I’m not going to talk too much about that, I know Ronan Lyons talked about that a week or two ago, but we know property prices have gone down sharply and that’s an issue for banks as well.  More seriously okay, oh yeah and of course another thing about getting back this big overhang of assets, it’s hard for look at here how they’ve caused ,they’ve shot down and this is affecting property prices, the flow of new housing lending, mortgage lending has collapsed, but that isn’t really affected very strongly the assets of the bank, because it’s hard to make property shrink by not building them, because they last for eighty years okay, so this overhang is a very slowly solvable problem, getting into debt is easy and quick, okay getting out of debt as a sectoral system is slow and difficult okay. 

Now here’s another really serious problem and again I’m just, at this point I’m speculating about the future, this might sink the banking system, this is the increase in mortgage arrears, right mortgage arrears are continuing up and there’s an enormous supply of mortgages, if you go back to those balance sheets and you look at mortgages and you look at the sliver of banking, equity capital, mortgage arrears coming out of those assets any fall in mortgage payments has to come out of that tidy sliver of equity capital and if it overwhelms it the banking system is broke, right and there is a risk here, so this is a real serious risk going forward.  Do I have a solution and do I have an answer?  No but it’s certainly something that is trouble okay.

Okay what about you know this is something I put here because just as I finish up, Colm McCarthy who isn’t here but would certainly want this slide, what are we paying for with all this debt?  And we have this big supply of Government debt, you know we are swimming in Government debt, we are approaching sovereign insolvency, where’s it coming from?  Well a lot of it is coming from these bank repayment costs.  This grey line, these green slashed lines here, note that huge chunk in 2010, there was also a big chunk in 2009 and another big chunk in 2011, if it weren’t for these bank repayment costs, even though Ireland would have suffered a big recession, the debt overhang wouldn’t be serious, it would be very you know feasible.  This is making the system close to or possibly insolvent right.  Now this is questionable Colm McCarthy says a lot of that was us paying back foreign banks, it was their fault, they leant us money when they shouldn’t have okay, so it’s partly their fault and we paid them back when we were a State, this is the Irish State, it was private banks, it was Irish Nationwide and Anglo in particular and the other banks making bad decisions, those are private institutions.  What are we as Irish tax payers paying them back okay, well partly to help the other European countries because it’s European banks that lent that money, well that’s questionable and Colm McCarthy feels and it’s very much in the news now we don’t have a responsibility as tax payers for those privately taken on debts okay and that’s a lot of the problem, right I’m not going to take a stand there, you can see it’s a mixed case, we spent that money right, we spent it on ourselves, but it was private money, so you can decide what you think is right or wrong about it, Colm McCarthy thinks we shouldn’t pay it back or maybe not all of it, it’s in the news even now we are fighting with the ECB saying a lot of this money should be paid by the ECB indirectly with money creation, because it isn’t really Irish and the Irish are doing their part let’s have some help and there’s talk about pushing big chunks of it out far into the future using ECB money creation.  So will we make it?  Will Ireland make it as a sovereign through this crisis?  Well this is what’s called a fan chart where you have some possibilities right and the answer is maybe okay as an economist right.  If things turn out well, if growth is reasonable Ireland is going to muddle through this crisis okay, if things turn out badly and growth is poor and the debt goes up there’s going to be another programme and another restructuring and more difficulty, so I don’t feel I’m strong enough and wise enough to make that call.  I do want to finish on an up note, there are good things in Ireland, what’s going to save Ireland if there’s a saviour it’s going to be our export growth, pharma, tech in particular and other export industries.  I know a lot of people talk about agri-food industry it’s had very good years but it can’t generate, it doesn’t have the scale potential to deal with 120 billion debt overhang, whereas tech and pharma and the other export sectors which are actually doing very well at the moment okay, can spin off into the domestic sectors and might make a difference, so if we can get growth and this is a picture of a bunch of techie type people, if we can get growth in the key future industries and this is something that Ireland has done well over the last ten years it’s got lucky, it has picked some good industries okay, it picked a lousy industry in the fifties when it went very heavily on agriculture as the key industry, that was the big mistake we now know okay, but now it seems to have picked some good industries so that’s the hope, it’s the export growth and the possibility that might make the difference and making us coming out on the right end of this painful but feasible grab.  Okay that’s it so let me see if there are questions or comments?  Go ahead.

Q & A

Participant 1: My question is multi-pronged, one of them is we know the banks have lent the money and what happens if the banks now have so much mortgages, say for example they have say 20 million mortgages and all of those 20 million, say 10 million comes back and says listen we can’t pay here, how can we pay back, now we have a huge chunk of houses that we can’t offload.
Yes okay.

Participant 1:  So how do they work through that, that is 1, and, 2, if they don’t lend how does liquidity recycle within this?

Yeah that’s absolutely, I mentioned that and that’s very true, one of the problems with the banks is they all want to shrink, so how do they want to shrink, oh they want to stop lending, but if they all stop lending house prices fall, no one can buy houses and then their assets which are effectively the houses, also the client who are they going to sell these repossessed houses to, yeah that’s a very difficult circular problem.  When one bank is in trouble it can just repossess houses and sell them and the whole banking system is in trouble yeah there is an issue that they can’t all sell the houses and not worth, you know not generate new houses, so that just had to be mulled through and there’s no simple solution to that.  Of course there’s no repossessions in Ireland anyway, effectively none, so it’s not a live issue.

Participant 1: Finally this is based on the assumption of what if, what is instead of having invested heavily into the mortgage, you know the construction industry, if they had passed the investment onto the production and other sectors, what would it have been like going by the graph?
Yeah we didn’t do that, we have put it into business investment and we didn’t do that, I don’t think that was feasible, it was such a flood of credit, it was going to go into, you know it was going to go to speculative property and that’s quite standard if you look around the world, credit flows tend to go into speculative property, because business investment is slow and difficult and you have to establish relationships, it doesn’t tend to have as volatile behaviour that the property development does, so most of the big bubbles generate property related bubbles.  Yes a question here…

Participant 2: How do you see financial regulation changing your response to events in the last couple of years, especially when for example when the Euro say in the late nineties, we had the example of the Asian crisis which showed that you know if you liberalise financial markets it might lead to a bubble so how come we didn’t see it then and what makes it different now that we might see it again?

Yes well financial regulation in Ireland was particularly bad okay, particularly bad, so if you go back to 2003, 2002 in Ireland you know it wasn’t even at the state as it should have been at that point.  Now of course you know it’s going much, obviously we’ve learned from that mistake and where everyone is tightening including Ireland.  Others made mistakes, the US made huge, you know more globally, more damaging errors in their financial regulation, so there were many errors and the Greek situation which was not on the financial regulation side, rather a national income fraud okay, where they actually fraudulently created their Government debt accounts.  There was a whole another situation, where do I see the financial regulation going?   Well I think probably there will still be problems as there always has been, you know people will find ways around the rules and create problems so that will never disappear.  There will always be smart operators who sneak around the system and create occasional crises, but I don’t think in my lifetime, you know my working life or even my mortal life that will see another financial crisis of this type, however another side which is the regulation of Government borrowing, now that’s changing fundamentally as you know and now we have this fiscal compact that’s just absolutely changing, you’ve heard the word austerity, it’s absolutely the rules are going to change fundamentally, in ways which are not all good alright there’s no one who is going to be flexibility about ah we really ought  to have a new anti-poverty programme and build some new hospitals this year and even if it costs a little more than we have, we will borrow it, that is going to go away okay, it’s going to be a very tight rein on Government spending in the Eurozone.  That’s part of the brittle system, we have locked ourselves on the mast and we made that decision and now we’ve realised part of that decision is we can no longer spend money unless we have it and that’s just locked in now and my opinion.

Participant 3:  Is that not a good thing fundamentally for us, I mean we needed to grow up?
Yes I think a lot of the economists are now thinking yeah in the long run probably we actually maybe in our mindset, we think about the German’s back you know when they were not talking about the Euro, Germans to characterise them unfairly but you know they do have a little bit of a mindset, a, b, we go this way, we are making, we are walking this way okay and I think they realised that was part of the deal.  The part of the hard currency zone was also you know fiscal austerity that you don’t spend what you don’t have, so that’s what we bought into.  We didn’t know we bought into it but now yes that’s what we bought into okay.

Participant 3:  Can I just ask you that wasn’t my question, it’s just I haven’t had the time to read the paper yet, the other day and Mr. Osborne or somebody like that said in England announced that because the banks were not doing their part of the bargain and they were not lending to the small and the medium sized business over there even and we are crying out for that here even more probably, they were going to do a Government level a kind of scheme that they are putting millions in that can be lent to bypass the banks and get this money out to the businesses that need it to run.  We obviously do need our small businesses to get going again to get, if we are to get any to do that curve that they are talking about.  Could we borrow the same thing here?

Again we have no funds.

Participant 3: But how are they doing it?

Well see they have funds because they are an accountant and they control, they can borrow freely to some extent, I mean there are limits even for the British but we have locked ourselves in now to this hard currency system, which means that we don’t really have borrowing opportunities.  The ECB though there is in fact, you know potential the ECB still has flexibility and they have, the ECB to give them credit have recently generated a lot of new credit flows to the banking system, but the banking system is still in an unstable situation, a lot of that has just been transferred effectively to Germany where there’s no need for new credit, so it’s still not flowing properly but the ECB has forced money, forced credit into the banking system through this long term refinancing operation so that and a lot of money like a trillion Euro’s worth of credit over the last few, you know in their programmes will be forced into the Eurozone banking system, but it isn’t a solution a Government programme, no Ireland cannot do that under the fiscal, I don’t think it’s feasible.  Question here.

Participant 4: A consequence of the austerity that is sweeping through the Eurozone and the world it seems to me is huge unemployment and can that be countered?

Well that you know that’s part, you’re right and a lot of people Paul Condron is a major commentator in the US is very against austerity because of that, it does cut back your budget deficit but at the same time in recessionary times it forces up unemployment.  No there’s no you know, you can Paul Condron thinks we should just go ahead and continue borrowing and there’s a probably a middle ground, I don’t have a solution for you but no they are linked, you can’t spend money to raise employment and at the same time lower your budget deficit, no you can’t get both, you can’t have your cake and eat it too question.

Participant 5:  I was under the impression that the Celtic Tiger era began roughly around 1996, 1997 and finished around 2007.  When you were speaking about credit flood you focused on the years 2003 to 2008.

Correct, yes there’s the good credit, there’s the good Celtic Tiger and the bad Celtic Tiger, there’s phase one and phase two and Morgan Kelly has a good paper on that.  The first phase was based on productivity growth, so 1997 to 2000, he says 2000 but it might be 2002 okay, 2002 is the date when the Central Bank actually became more liberal in its policies but maybe he claims it’s about 2000, so there was a good Celtic Tiger and a bad Celtic Tiger.  The first one was based on real productivity gain and the second one was based on hard credit influx and you might look at Morgan Kelly’s straight forward paper you know.

Participant  6:  They always said before the “R” word was admitted or used there would be jobless recovery, not just in Ireland and America, everywhere they said. Is that the case?

In recessions the jobs of the last thing to come.

Participant 6:  But will they come eventually, nothing like they were obviously?

No I am a financial economist and you really need to ask a labour guy you know, so I won’t answer that question because if someone found out I was claiming I knew about employment you know trends I’d get in trouble yeah.

Participant 1: In relation to what you said about unemployment now, I know countries like Japan, China and even Germany at a certain time had to say okay we are in this mess now, what if we just look inwards instead of having to say okay we actually have ... because yeah  I understand this metric thing and the Eurozone policies but if Ireland as a nation is also looking within these walls, shut the doors and let’s see what we can make from home here.
Small open is Ireland’s solution, I really think small and open, if we are small and open and small open is the future, in fact that’s the future small and open.  I mean what are these guys doing you know, they are selling around the world that’s the key thing.  Little technologies that are not particularly hot, not particularly fancy sold everywhere.

Participant 1:  Reduce the imports.

Reduce the what?

Participant 1:  Imports rather than...

Oh no because they need imports, no, no I don’t think that’s the solution for Ireland, no I have to say, I’d say absolutely not, absolutely not yes.

Participant 7:  Just there recently, you know a couple of months ago you had the Government basically calling the banks to reduce the interest rates, you know for the lending like, how can the banks get the money to lend, to try and increase their profits, if they are brought in and say look you can’t do that.

Yeah that’s true, yeah that was a very, you know they want bank profits because how are you going to get the banks back to decent situation by having them generate profits, but at the same time you want lending and you don’t want it to be too high cost, yeah you know this whole system is nothing but a balancing act of difficult interlinked problems, that’s what debt, you know unravelling the debt problem is a difficult but when it’s aggregate in this whole economy is a difficult and slow process and whether we will get there is you know, going back to your point you know unemployment Government debt, we have a huge Government debt problem and we have an unemployment problem, how do you solve an unemployment problem?  Government expenditures.  How do you solve a debt problem?  Not having Government expenditures, you know what do you need to get your debt low, you need growth.  How do you get growth?  Spend more but that’s also how you get debt, so yeah there’s all these difficult decisions at the margin, right that’s where we have to hope these guys, you know do a good job selling whatever they are selling.  Go ahead, I better just take two more and we’ve got to stop go ahead.

Participant 3:  Tell me you said part of the problem is a kind of what they call a political class, do you see younger political groupings coming up of people in their thirties or forties who are ready to take power or are they all just leaving?  I don’t see anybody new in the media that seem ready to go into Government and replace but when our present crop retire as they will have to eventually and are there people there, are they coming in? Are there people there who could give leadership? Are they coming in? Do you meet people...?

That question is beyond me, I do, I didn’t mention but the political class in the noughties, in the second half of the Celtic Tiger did fail in a really spectacular way in financial regulation and property, I mean the Mahon Tribunal issues they are also related to property, so there was a very corrupt system for a developed western economy in the early years of the 21st Century, but how can we replace, sorry I’ve only lived in this country 20 years I’m not old enough, go ahead.

Participant 8: Actually similar to what this gentlemen was talking about, I’m just wondering about competitiveness, I mean isn’t that a big issue in terms of the price of everything went up in Ireland and we became less competitive.

Correct in the second part of the Celtic Tiger.

Participant 8:  Tied back into vested interests and the political class is the sense that there’s still like doctor’s fees, like dentist’s, professional fees are still much higher than they are in the rest of Europe and this is still obviously an issue in terms we obviously have to pay for it, professional fees and we ... the Government has to pay for them.  So I mean it’s tackling that problem.

Yes absolutely, I think that absolutely is really you know one of the things to get the economy continuing to, it has had a big improvement in competitiveness over this terrible five year period, but at the same time that has to not stop, but that’s something where they are making progress, there is some slow progress I think on that one, you know.  Okay so thanks very much and I hope you enjoyed and got something.  Thank you.  (clapping)

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