Irish Economy
Irish Boom & Bust: Could conventional wisdom be fooled again?
By Michael Hennigan, Finfacts founder and editor
Feb 13, 2015 - 8:09 AM

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Snow blankets the courtyard of Government Buildings, Dublin

Irish Economy Boom & Bust: We wonder if conventional wisdom could be fooled again following this week's dramatic acknowledgement by an economist of unimpeachable professional integrity, that both he and Ireland's leading economics think-tank were "totally wrong" in May 2008 when an assessment was made that the "Irish economy is resilient in the face of adverse circumstances" and "the fundamentals of the Irish economy are sound."

John FitzGerald, who retired as a research professor at the Economic and Social Research Institute (ESRI) last December after 30 years of service told the Banking Inquiry investigation of Ireland's financial collapse on Tuesday that the ESRI's 'Medium-Term Review 2008-2015' [pdf], which was published on May 14, 2008, "took no account of the potential financial collapse that might occur in the US and, especially in Ireland. It did not provide any preparation for the dramatic shock that was to hit the Irish economy five months after the Review was published."

The late Brian Lenihan, finance minister for just 8 days, must have been very happy to receive the ESRI's report which said the economy has "the potential to grow at around 3.75% a year over the coming decade, despite significant short-term problems." It added that the drivers of Irish economic growth are changing. "Exports of business and financial services are a vital contributor to growth" — this too was wrong.

Long before the current government acknowledged the international momentum for corporate tax reform, Finfacts with what John Kenneth Galbraith (1908-2006), the renowned Harvard economist, once called "a kind of built-in dissidence, a will to be inconvenient, a desire to afflict the comfortable," highlighted that most of the growth in business services exports was fake and resulted from tax avoidance.

Prof FitzGerald in his opening statement [pdf] did cite economic warnings made by the ESRI during the bubble years but what was shocking about the testimony was that the economist had found himself as a 'soft landing' hopeful along with the commercial economists and some academics who had made handy earners [apparently €5,000 a pop] writing 'economic assessments' to accompany developers' planning applications and puff pieces for mortgage lenders.

The subprime mortgage crisis had received national attention in the US from February 2007 when HSBC, the banking group, warned that it had lost billions of dollars in the US sector.

Big Irish developers had stopped servicing their loans after the outbreak of the international credit crunch in August 2007 and Morgan Kelly, professor of economics at University College Dublin, had warned in very strong terms of the damage that would follow a collapse of the housing market.

John FitzGerald acknowledged at the Banking Inquiry that he had not given sufficient attention to the banking situation even though he was aware that the Central Bank and financial regulator were effectively incompetent. He also said that the Department of Finance "was completely different now having gone through a cultural change," with loads of economists doing lots of interesting work and it was a very different world to when he spent 12 years there, leaving in 1984. He said there were too few economists then and it showed.

We do not agree — see below!

John Kenneth Galbraith, who had been a professor of economics at Harvard University for over half a century, spoke in 1986 of the "tendency to leave the real world alone. It's something that in Cambridge (location of Harvard) we call the 'Belmont Syndrome.' Belmont is an extremely comfortable suburb adjoining Cambridge, and the 'Belmont Syndrome' is a desire to move from a peaceful, happy life in Belmont to a peaceful, happy life at Harvard, from life to computer and back again, without any disturbance from Ronald Reagan."

The Canadian-born economist was one of John F. Kennedy’s closest advisers, and US ambassador to India. I have read several of Galbraith's books, which the master of prose interweaved with witty and pithy observations that won a big audience beyond his profession.

Galbraith wrote in 'The Affluent Society' (1958):

Ideas come to be organized around what the community as a whole or particular audiences find acceptable. And as the laboratory worker devotes himself to discovering scientific verities, so the ghost writer and the public relations man concern themselves with identifying the acceptable. If their clients are rewarded with applause, these artisans are qualified in their craft. If not they have failed. However, by sampling audience reaction in advance, or by pretesting speeches, articles, and other communications, the risk of failure can now be greatly minimized. [ ] Familiarity may breed contempt in some areas of human behaviour, but in the field of social ideas it is the touchstone of acceptability. Because familiarity is such an important test of acceptability, the acceptable ideas have great stability. They are highly predictable. It will be convenient to have a name for the ideas which are esteemed at any time for their acceptability, and it should be a term that emphasized this predictability. I shall refer to those ideas henceforth as the conventional wisdom."

Louis Menand, an American academic and author, wrote in 'The New Yorker' in 2005: "Our system of expertise is completely inside out: it rewards bad judgments over good ones." In a review of the book: 'Expert Political Judgment: How Good Is It? How Can We Know?' by Philip Tetlock, he wrote, "that people who make prediction their business — people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables — are no better than the rest of us. When they’re wrong, they’re rarely held accountable, and they rarely admit it, either. They insist that they were just off on timing, or blindsided by an improbable event, or almost right, or wrong for the right reasons."

A US study reported by Tetlock showed that the average expert was found to be only slightly more accurate than a dart-throwing chimpanzee. Many experts would have done better if they had made random guesses. Tetlock cites Archilochus, the Greek poet who had observed about 2,700 years ago: “The fox knows many things, but the hedgehog knows one big thing.” Isaiah Berlin in his famous 1953 essay “The Fox and the Hedgehog” contrasted hedgehogs that “relate everything to a single, central vision” with foxes who “pursue many ends connected…if at all, only in some de facto way.” This was an illustration of specialists and generalists at work.

“People are not as good at anticipating the future as they think they are,” reckons Tetlock who is a professor of psychology and management at the University of Pennsylvania.

Tetlock's conclusion: when seeking accuracy of predictions, it is better to turn to those like "Berlin's prototypical fox, those who know many little things, draw from an eclectic array of traditions, and accept ambiguity and contradictions." Ideological reliance on a single perspective appears detrimental to one's ability to successfully navigate vague or poorly-defined situations (which are more prevalent today than ever before).

Defying conventional wisdom

So-called black swan events are rare and it usually pays — in money terms — to go with the flow.

Even in universities academic staff with tenure can have public opinions on many issues but rarely about for example reform of the place they work.

Last December we published a piece on the high personal cost of dissent and in particular of whistleblowing in terms of the risk of being viewed as a pariah by even generally ethical people.

Paul Moore, who had been head of Group Regulatory Risk at Britain’s biggest mortgage lender HBOS, between 2002 and 2005  — it had to be bailedout by the British Government — commented to a House of Commons committee: “I am still toxic waste now for having spoken out all those years ago!”

Irish conventional wisdom today

Ireland has become less conservative when it comes to social issues but it remains a very conservative place while the insiders mainly comprise older men who came to prominence in bubble times.

It will take a generational change before we can say with confidence that "all changed changed utterly" — words used by William Butler Yeats in his poem 'Easter 1916.'

Last week Enda Kenny, taoiseach, exited a meeting in Brussels with Jean-Claude Juncker, European Commission president, suggesting that they had discussed the Irish headline corporate tax rate of 12.5%. It's very unlikely that Juncker, the architect of Luxembourg's corporate tax haven as prime minister for 18 years, had that specific item on his list of issues to be discussed.

“In so far as tax is concerned, President Juncker is very clear that the setting of corporate tax rates is a matter of national competence under the treaties, and that there will be no change in Ireland’s tax rate of 12.5%. We’re very clear on that and so is the president,” Kenny told reporters following the meeting.

This is the old political trick of answering a question you wished was asked.

That in itself is not a big issue but in the context of this government's addiction to political spin, it is part of a pattern that corrodes public trust.

Ireland: Government's spin and lies damage the economy

George Orwell, bullshit and 2015 New Year resolution for Irish Government

  • Aided by distortions in the national accounts, there are few statements today from the Government that can be taken at face value — The idiot/ eejit's guide to distorted Irish national economic data
  • The Department of the Taoiseach admitted to Finfacts that it did not use official CSO data on employment and unemployment when the Government falsely set a target that all jobs lost in the recession would be replaced by 2018 — Ireland: Government explains how it understates recession job losses
  • We do not share John FitzGerald's confidence that Department of Finance economists will usher in change. Named and anonymous officials were used to defend ministerial talking points, which made claims about the corporate tax regime — "transparent"; "rules based" tax system where there are no "special deals"; "flawed premise" to even consider profits routed through Ireland to Irish offshore shell companies as having anything to do with Ireland — have been shown to be economies with the truth. See: here, here and here.
  • We wrote in 2009 that if you Google "Irish Reform," top of the results list is appropriately a nineteenth century British Act of Parliament: The Irish Reform Act of 1832. In 2015 it remains so and almost 7 years after the economic crash, change in conservative Ireland comes ever so slowly if at all.
  • With the exception of reforms at the Central Bank under the leadership of Patrick Honohan, little has changed elsewhere. Do not be surprised that as with the appointment last year of a new secretary general at the Department of Finance, Patrick Honohan's successor may well be a 'reliable' insider.
  • Irish politicians used to fear mitres and wigs but the latter still holds sway. Speaking on RTÉ’s Prime Time in December 2013, Richard Bruton, enterprise minister, said progress on the Legal Services Regulation Bill, introduced in 2011, had been delayed because the priority was to bring in personal Insolvency legislation to deal with families in distress. The courts and the big professional firms have been have been heaving with activity through boom and bust, with the Exchequer picking up big tabs and the minister said the Government could not multitask during an economic emergency? The Competition Authority said in April 2012: "In November 2010, the Government signed a Memorandum of Understanding (MoU) with the EU/IMF. The MoU included a commitment that, by the end of the third quarter of 2011, the Government must establish an independent regulator and implement the outstanding recommendations of the Competition Authority. In October 2011 the Minister for Justice, Equality and Defence, Mr. Alan Shatter, TD published the Legal Services Regulation Bill"  — Key Irish legal services reform parked in Limbo
  • Michael Noonan, finance minister, met the bailout troika's demand for a fiscal advisory council but it has been designed to be an intellectual ornament, which does not produce its own forecasts, with a membership appointed by the minister and with reporting accountability to the Department of Finance. In Australia, the equivalent is the Parliamentary Budget Officer (PBO) who is an independent Officer of the Parliament and is not subject to direction in the performance of his/her functions. The current incumbent has said that the "PBO has had a significant impact in helping to level the playing field for non-government parties and independent parliamentarians as they develop their policies. It has done so by helping to redress the asymmetry of access to costing and budget information services that existed prior to the establishment of the PBO." The PBO also costs party proposals at election time. Why would a politician who was then sixty-nine years old and who had long experience of the wilderness on the Opposition benches, once inside the tent, agree to a restrictive regime that benefits the Department of Finance, which had a disastrous record during the property bubble? It can only be explained by innate conservatism.
  • Dr Julien Mercille, a French-Canadian who lectures at University College Dublin (UCD) has shown how the mainstream media for most of the bubble years went with the flow. 'Breaking the Mould: How the PDs changed Irish Politics' written by Stephen Collin, Irish Times political editor, and published in 2005, noted in its promotional material: "Their low-tax, free-trade agenda has been the dominant philosophy of the Celtic Tiger and has transformed the whole intellectual climate of Irish public life. The PDs have been vastly more important than their time in government has warranted, impressive though that has been." On McCreevy's taxing cutting agenda that was in tune with the PDs, Collins wrote: "McCreevy would be proved right in spectacular fashion in the years that followed."  The Irish Examiner reported in 2007 that the PDs treated his book as a  hagiography and it ordered 50,000 copies in advance of the 2007 general election — Irish mainstream media in times of boom and bust
  • The media needs some self-examination too and it took the Irish Fiscal Advisory Council to report that the exhaustion of superlatives on the H1 2014 economic performance had been overdone — 43% of rise in H1 2014 GDP from manufacturing overseas - Irish Fiscal Council
  • Neither the taoiseach nor Richard Bruton, enterprise minister, have said nothing of substance on long-term enterprise policy since assuming office in March 2011. Nevertheless, the status quo of telling American company chiefs that there is an open phone line to the taoiseach's office is reaching its sell-by-date.
  • A current example of a disengaged Oireachtas (Irish Parliament) coupled with journalists as mainly cheerleaders of their sector, that echoes the property bubble, is the absence of any debate on the floundering goal for Ireland to become a world leader in science by 2020 — this aspiration had replaced the 2006 goal to be recognised as a "world class knowledge economy" by 2013. When the members of the Oireachtas have nothing to say and most technology journalists are cheerleaders of the high tech sector, any debate on the inflation-adjusted €24bn spent on science policy over the last decade would be confined to the web — which in Ireland has been long-viewed with suspicion by long-in-the tooth journalists.
  • The broad measure of unemployment as used in the US and by the IMF during the Irish bailout period is 21% — Irish Economy 2015: January Live Register + schemes at 446,000 - broad jobless rate at 21%

Ireland has 4,000 exporters, Denmark has 30,000

Scotch whisky exports at £3.9bn; Irish whiskey exports at €365m

Benchmarking Irish food & drinks industry in 2015 - Part 1

Ireland: Cash outflows of €20bn in crisis years 2010/11 remain unexplained

Ireland: Financial services 'strategy' a menu of 30 steps; 24,000 or 35,000 jobs?

Key Irish legal services reform parked in LimboFour years in power and the current Irish government has been afraid to upset the wealthy lawyers.

Forty American firms account for two-thirds of Irish exports

Chinese investment into Europe at record high; UK on top, Ireland hopes

Ireland 2016: "Best small country in the world" for business? - a FAIL

Benchmarking income tax to attract Irish emigrants home - spin or substance?

Ireland: McKinsey not as sanguine as Noonan on debt sustainability

Ireland: Jobs in foreign-owned exporting sector in 2014 below 2000 level

Enterprise Ireland says a net 8,476 jobs were added by client firms in 2014

Israel's Startup Nation not a jobs engine; Nor is Irish high tech

Irish Medium-Term Economic Strategy 2014-2020: Innovation and entrepreneurs?

In 2013 Prof Frank Barry of Trinity College in a paper, 'Politicians, the Bureaucracy and Economic Policymaking over Two Crises: the 1950s and Today' [pdf], compared the disastrous Irish policy making of the Lilliputians of recent times with the times of giants like TK Whitaker, who was appointed secretary of the Department of Finance in 1956.

Barry said the philosopher Plato could not explain 'where he would find the wise men who would govern his ideal state'. Experience since seems to show the best results come from the paradox of competing sources of power jockeying for their own advantage.

He says this is the key that draws together the findings of the three independent reports of 2010 and 2011 into the weaknesses and failures of the Department of Finance, the Central Bank and Financial Regulator — besides 'deference and diffidence', the reports refer to 'groupthink'.

Prof Barry says that this is less of a problem of course if the institution in which it prevails is only one voice in the mix.

The paper says:

As far back as 1987, TK Whitaker said that he would like to see 'a restoration of the old (civil service) principle that you were independent of ministers. You gave your views on any new proposals fearlessly, critically, honestly. You did not care whether your views were likely to commend themselves to the minister, whether for their own sake or politically. Once a decision was taken by minister or government, however, you carried it out as loyally and efficiently as you could. That was my understanding of the function of senior civil servants but I’m afraid it has been undermined. The young men who are preoccupied about this generate deep disappointment in me by telling me that that was an old world that has vanished. In the new world, the civil servant is all the time trying to please the minister, over-conscious of what might be politically acceptable, arranging the options so that they will appeal, rather than in strict order of eligibility']

It would surely be a good thing!

...and the answer to the question in the title is yes.

Finfacts does not need any report to rationalise this sorry tale and unlike, those who went with the flow and kept silent to get baubles from ministers or contracts, we challenged the conventional wisdom, even though banks were among our customers.

We began our breaking news service in January 2005.

Oct 2005

It says a lot about Irish public governance, the competence of individual Ministers and the senior bureaucrats, that everyone in a position to make what would have been commonsense and basic business decisions, did not do so until several hundred millions of euros disappeared down an Information Technology sink-hole and billions were underestimated on roadbuilding projects.

Instead of putting party flunkeys on the public payroll, has there been anyone in Government with the savvy to propose a CIO - Chief Information Officer - with key experience in world class IT organisations and successful project implementation experience? A similar function with responsibility for major infrastructure projects would surely have also been merited.

Ireland's Celtic Tiger 2005: Built to last or on a foundation of quicksand?

Global House Price Boom: The greatest BUBBLE in history

June 2005

The risk for the world economy is that over the past four years, US consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking.

Dec 2005

The buck simply stops nowhere.

Ministers pass the buck to public servants who are now subject to the regime called benchmarking, as referred to above, with phantom targets and so on.

It's a joke of course and no matter how big the blunder may be, nobody is accountable. This is one benefit of decision by committee.

So as the sands of globalisation, move under our feet, there is staggering incompetence at the heart of government and certainly no interest in contemplating how long will the good times last?

May 2006

The Central Bank reported last month that Irish residential mortgage lending continued to expand at a rapid pace in January, when the year on-year growth rate (adjusted for securitisations) reached a new record high of 28.8%, up from 28.5 % in December 2005.

The Central Bank has advised Finfacts that it does not require lenders to provide data on interest-only loans.

In recent years, more than 75% of Bank of Ireland investment customers have availed of the bank's ten-year interest-only mortgage, according to Bank of Ireland Mortgages Manager Olive Moran.

"It's very attractive as it enables investors to defer capital repayments for the first ten years," Moran told the Sunday Business Post.
"They can then spread the capital repayments over the remaining period of up to 15 years. Alternatively, if they have access to a lump sum from a personal pension policy, they can use these funds to repay the outstanding capital."

Last year, the US BusinessWeek magazine obtained the first-ever measurement by metro area of the increasing popularity of interest-only mortgages, and it showed that San Diego rates No. 1, by number of "IOs" in 2004. In metro San Diego, 47.3% of all mortgages required interest payments only in their early years. The survey covered the top 50 metro areas in the US and measured by the total number of mortgages issued. Atlanta, San Francisco, Denver, and Oakland, California, followed close behind San Diego. Milwaukee turned in the lowest number, just 4.8% interest-only loans last year.

The Economist also noted in 2005 that interest-only mortgages are all the rage, along with so-called “negative amortisation loans” (the buyer pays less than the interest due and the unpaid principal and interest is added on to the loan). After an initial period, payments surge as principal repayment kicks in. The Economist said that in California, over 60% of all new mortgages in 2005 were interest-only or negative-amortisation, up from 8% in 2002. The national figure is one-third.

Interest-only mortgages accounted for less than 2% of all US loans as recently as 2001.

Irish Economy 2006 and Future of the Celtic Tiger: Putting a brass knocker on a barn door!

Oct 2006

Taoiseach Bertie Ahern, said that problems in health and other public services cannot be solved unless working practices change.

Ahern said change and modernisation in the public service could be achieved only if staff extended their working day.

He said it would not be possible to face challenges in the future if public sector workers wanted to work only six hours a day and take a half-day on a Friday.

So in the tenth year in power, it's as if he had never heard of benchmarking

Nov 2006

In a report in The Financial Times issue of August 12th, 2006, on Irish buyers driving up farm prices in the UK, Matt Dempsey editor of The Farmer's Journal is quoted: "When you can now sell a piece of rezoned farm land on the edge of a town in Ireland for €500,000 an acre, several farmers have found themselves very rich."

A quarter of the €18.5bn of taxpayers' money being spent on new main roads will go into the pockets of landowners and archaeologists.

The Irish Independent reports today that an astonishing €4.6bn will be spent on compensating landowners along the routes of roads by companies over the next 10 years.

Irish Junior Minister Tom Parlon and President of the Progressive Democrats has warned that any change in the restrictive rezoning system of land for development that has a 20-50 times multiplier effect on values, would be to the "left of Stalin" even though as a big farmer, he is a significant beneficiary of European socialism.

Dec 2006

Patrick Honohan, Trinity College economics professor: Nevertheless, the business sector and indirectly - - Irish mortgage borrowers have had access to global finance. Indeed, there has been a very rapid recent growth in foreign borrowing by banks to finance their mortgage lending. In the past few years banks borrowing from abroad to onlend to Irish residents has soared from 10 to 41% of GDP.

In the past, financial markets served a watchdog role, and penalized national overborrowing with high interest rates. But now that Ireland is in the Eurozone, Honohan notes, the watchdog is muzzled and even high rates of borrowing can proceed without any warning sign from the markets.


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