McCreevy "The mistake is to try to spend [money] when you haven't got it."

[TheBigShort]

We should have been running a €10 billion surplus in order to cool the economy.

What would you have done with this €10bn surplus, bearing in mind the record house prices, low unemployment, low national debt ratio to GDP etc

 

[odyssey06]

From here https://countryeconomy.com/deficit/ireland. You can also get them on Eurostat.
You can look at the budget deficit as an overdraft on your chequebook and the national debt as accumulated interest you owe on your overdraft. If interest rates fall, you can pay off accumulated interest, i.e. your personal national debt is reduced, and at the same time you could convince your bank manager to increase the level of your overdraft, i.e. to increase your personal budget deficit.
They do. The web site you referenced https://tradingeconomics.com/ireland/government-budget correctly tells you that: “Ireland recorded a Government Budget deficit equal to 0.70 percent of the country's Gross Domestic Product in 2016. Government Budget in Ireland averaged -3.20 percent of GDP from 1995 until 2016, reaching an all time high of 4.90 percent of GDP in 2000 and a record low of -32.10 percent of GDP in 2010.”

4.9% is a positive figure, it means there was a budget surplus, which unless I'm really reading the statistics backwards, is also the case for the official government estimates:
http://www.budget.gov.ie/Budgets/2000/Tables.aspx

Your interpretation of the statistics appears to be that in 2010 at the height of the recession we had a budget surplus of 32%?
http://www.finfacts.ie/irishfinancenews/article_1022150.shtml

1997 was the first budget in a generation (i.e. 1980) to record a budgetary surplus - I think that might have been just before McCreevy's time.
McCreevy continued this trend and only recorded one budget deficit, in 2002.
But you seem to be interpreting the statistics such that 1997 was the first to record a deficit?

​

 

[Purple]

What would you have done with this €10bn surplus, bearing in mind the record house prices, low unemployment, low national debt ratio to GDP etc

I would have but it into a reserve fund. It should have been taken out of the economy in order to cool things off. Then used to heat things back up again when the crash came. In short it should have been used as a tool in counter-cyclical economic planning. Tax cuts, tax breaks, pay increases, welfare increases, pension increases, State Sector employment numbers boom; it all added fuel to the fire. Cheap Credit, a massive increase in money supply and reckless lending were only part of the problem. It was all populist and irresponsible. Blaming Lehman Brothers or Fannie Mae or anything else is a cop-out. We were, to a great extent, authors of our own destruction. The good news is that means that we are not powerless to prevent the same thing happening again.

 

[Purple]

If you can just inflate debt away why doesn't everybody do it?

Everybody does do it, or at least tries to do it. They have done since the 1950's.

 

[Firefly]

I would have but it into a reserve fund. It should have been taken out of the economy in order to cool things off. Then used to heat things back up again when the crash came. In short it should have been used as a tool in counter-cyclical economic planning. Tax cuts, tax breaks, pay increases, welfare increases, pension increases, State Sector employment numbers boom; it all added fuel to the fire. Cheap Credit, a massive increase in money supply and reckless lending were only part of the problem. It was all populist and irresponsible. Blaming Lehman Brothers or Fannie Mae or anything else is a cop-out. We were, to a great extent, authors of our own destruction. The good news is that means that we are not powerless to prevent the same thing happening again.

And thankfully, we have those EU rules on borrowing limits to keep us in check!

 

[TheBigShort]

I would have but it into a reserve fund. It should have been taken out of the economy in order to cool things off. Then used to heat things back up again when the crash came. In short it should have been used as a tool in counter-cyclical economic planning. Tax cuts, tax breaks, pay increases, welfare increases, pension increases, State Sector employment numbers boom; it all added fuel to the fire. Cheap Credit, a massive increase in money supply and reckless lending were only part of the problem. It was all populist and irresponsible. Blaming Lehman Brothers or Fannie Mae or anything else is a cop-out. We were, to a great extent, authors of our own destruction. The good news is that means that we are not powerless to prevent the same thing happening again.

Broadly, and on face value, I would generally agree with this. But in the context of the Irish economy at the time it doesn't quite fit. Putting a budget surplus into a reserve fund would not have stopped the availability of credit. It was private bank lending that fuelled the construction and housing boom. Combined with low unemployment wage pressure demands would still occur.
I think blaming Lehman or Fannie or FF or individuals is all a cop out. Given the chance to borrow €10m to make €20m five years later, why wouldn't a developer take that opportunity?
The problem is the system, as a whole. It has no ceiling, no structure to divert or avert spiralling wealth ( and by that I mean non-productive wealth, land hoarding, $450m Da Vinci paintings, €30m Ferraris, gold stores etc) into areas that are crying out for basic infrastructure investment.
I don't blame anyone for obtaining or desiring that type of wealth, but there has to be a point where we as a society can say - you aren't getting anymore?

 

[Purple]

Broadly, and on face value, I would generally agree with this. But in the context of the Irish economy at the time it doesn't quite fit. Putting a budget surplus into a reserve fund would not have stopped the availability of credit. It was private bank lending that fuelled the construction and housing boom. Combined with low unemployment wage pressure demands would still occur.

I think blaming Lehman or Fannie or FF or individuals is all a cop out. Given the chance to borrow €10m to make €20m five years later, why wouldn't a developer take that opportunity?

We currently have Central Bank lending rules in place for Banks and borrowers. There was nothing stopping us putting those rules on place in 2002. When I bought my first apartment in 1996 (I bought it because I thought there was going to be a property boom) I could only borrow 2.5 times my income. What happened to those limits? When I bought my last house in 2005 as a married man we were offered 8.2 times our combined income. The notion that we were powerless victims of global factors is a cop-out.

The problem is the system, as a whole. It has no ceiling, no structure to divert or avert spiralling wealth ( and by that I mean non-productive wealth, land hoarding, $450m Da Vinci paintings, €30m Ferraris, gold stores etc) into areas that are crying out for basic infrastructure investment.

If we want people to invest more in productive (wealth generating) investments then we need to make it easier to open and run businesses. Why open a business which employs people and makes things when you then become a “greedy employer” and have all the hassles associated with running that business only to be taxed at a marginal rate of over 50% when you can just invest in “the Markets” or assets and pay 33% on your profit?

I don't blame anyone for obtaining or desiring that type of wealth, but there has to be a point where we as a society can say - you aren't getting anymore?

We can’t do anything in isolation but as a global economy we should change tax systems so that capital is taxed more.

 

[TheBigShort]

What happened to those limits?

To my reckoning, there was so much pent up demand for housing that prices were exceeding the reach of your average buyer. Either wages rose (inducing an spiraling inflationary effect) to meet the increase in house prices or, credit became more readily available.
To my mind, this is where the regulators started to turn a blind eye. Upon political inertia, banks just opened the credit floodgates.

When I bought my last house in 2005 as a married man we were offered 8.2 times our combined income. The notion that we were powerless victims of global factors is a cop-out.

We weren't powerless (be 'we' I mean the financial authorities). They knew what was happening and they employ people of expertise to advise etc.
My wife and I were offered 5 times our income once, we were tempted, but did the math and it made no sense. However, if the institution purporting to be an expertise on financial matters tells you that you can afford 5 times or 8.2 times, is it any wonder that lots of people believed them?
I've mentioned this before, for most people a mortgage is the biggest single financial transaction they will ever undertake. For most it is once or twice in a lifetime. If the financial 'experts' approve a mortgage 5 times income or more (based on their financial analysis), why shouldn't joe the plumber or jack the mechanic or mary the beauty therapist take their word for it? What is the point in having financial institutions if their financial advice is not to be undertaken?
These guys were peddling thousands of loans every day, five days a week for years.

We can’t do anything in isolation but as a global economy we should change tax systems so that capital is taxed more

I agree.

 

[Purple]

To my reckoning, there was so much pent up demand for housing that prices were exceeding the reach of your average buyer. Either wages rose (inducing an spiraling inflationary effect) to meet the increase in house prices or, credit became more readily available.

Cheap credit and massive wage increases led to the increase in house costs, not the other way around. If the Central Bank had imposed income multiple limits such as they have now we would have avoided most of the credit and housing bubble.

To my mind, this is where the regulators started to turn a blind eye. Upon political inertia, banks just opened the credit floodgates.

Agreed. The State didn’t do its job; it should have stopped this, and had the power to do so, but didn’t.

However, if the institution purporting to be an expertise on financial matters tells you that you can afford 5 times or 8.2 times, is it any wonder that lots of people believed them?

Yes, it is. I still find it hard to believe that people were so irresponsible.

I've mentioned this before, for most people a mortgage is the biggest single financial transaction they will ever undertake. For most it is once or twice in a lifetime. If the financial 'experts' approve a mortgage 5 times income or more (based on their financial analysis), why shouldn't joe the plumber or jack the mechanic or mary the beauty therapist take their word for it?

They shouldn’t have taken their word for it precisely because “for most people a mortgage is the biggest single financial transaction they will ever undertake”. When making the biggest financial decision of your life you should spend 5-10 minutes thinking about it. A blunt pencil and the back of a fag packet in the time it takes to take a dump would be sufficient to avoid many, if not most, of the cases we now see in the media.

What is the point in having financial institutions if their financial advice is not to be undertaken?

That’s like saying what’s the point in having car salespeople if their advice on what car to buy and how to finance it can’t be taken.

 

[TheBigShort]

Yes, it is. I still find it hard to believe that people were so irresponsible.

No its not. Its part of human behavior - follow the herd, get in first and get ahead of the pack, keeping up with the jones, etc..etc.. That is why there is an industry of trained and highly qualified experts in the field of finance. So that they can decipher the financial information in front of them and apply appropriate lending policies.

Instead, they were went crazy approving loan after loan after loan. Collectively, the lenders were engaged in the biggest financial decisions of their lives - you would have thought they would have spent 5-10 minutes thinking about it?

 

[cremeegg]

Cheap credit and massive wage increases led to the increase in house costs, not the other way around. If the Central Bank had imposed income multiple limits such as they have now we would have avoided most of the credit and housing bubble.

True. And we would have 200,000 less houses today.

 

[Purple]

No its not. Its part of human behavior - follow the herd, get in first and get ahead of the pack, keeping up with the jones, etc..etc..

That's assuming people are incapable of rational thought. I think they are.

That is why there is an industry of trained and highly qualified experts in the field of finance. So that they can decipher the financial information in front of them and apply appropriate lending policies.

You are talking about the Central Bank, the Financial Regulator and the Department of Finance here, right?

Instead, they were went crazy approving loan after loan after loan. Collectively, the lenders were engaged in the biggest financial decisions of their lives - you would have thought they would have spent 5-10 minutes thinking about it?

Yep, it takes two to tango. Both parties have to take responsibility for their actions. One side blaming the other is a cop-out.

 

[odyssey06]

To continue the car analogy... it's very easy to be irresponsible when you are driving someone else's car... in the end it was the bank's shareholders who took the biggest hit - not the staff who crashed the car.

We should have been looking at ways to get the bank's owners to get each of their own banks to act responsibly, in their own long term interest - instead of the cat and mouse game we now have by seeming to place all the onus of ensuring responsibility on the regulator and expecting irresponsible banks.
I suppose that's the moral hazard of 'too big to fail'

 

[Purple]

True. And we would have 200,000 less houses today.

Would there be though? We hardly built a house for 8 years. Without the bubble and crash we'd still have functioning construction and banking sectors. Would we not have managed to build those 200,000 houses, and more, over the last 8 years?

 

[TheBigShort]

That's assuming people are incapable of rational thought. I think they are.

Of course they are, but they are also capable of irrational behavior.

You are talking about the Central Bank, the Financial Regulator and the Department of Finance here, right?

Absolutely. But also the banks are equipped internally with their own auditing and monitoring divisions. Given the nature of the business they are involved in (buying and selling money), it would be incomprehensible and reckless if they didn't have their own sufficient checks and balances in place, right?
Unless you think the regulators should hold the hands of the banks every step of the way?

Yep, it takes two to tango. Both parties have to take responsibility for their actions. One side blaming the other is a cop-out.

Each side takes responsibility for sure. If I make 1 bad loan through borrowing, I am responsible for my one bad loan, not everybody else's bad loans - there is no 'we' in this circumstance.
If I make ten of thousands of bad loans through lending, day after day, week in week out, I am responsible for all those bad loans - there is no 'we' either.

In the end, its the system that facilitates all these bad loans to happen.

 

[Purple]

Absolutely. But also the banks are equipped internally with their own auditing and monitoring divisions. Given the nature of the business they are involved in (buying and selling money), it would be incomprehensible and reckless if they didn't have their own sufficient checks and balances in place, right?
Unless you think the regulators should hold the hands of the banks every step of the way?

The State had a responsibility to protect the citizen.

In the end, its the system that facilitates all these bad loans to happen.

The State, through the Central Bank, Department of Finance and Financial Regulator, created the Irish system. There is no good reason why the Irish State could not have constructed our system in such a way that the impact of the international financial crisis on the citizens of this country was far smaller than it turned out to be. We were being warned about pro-cyclical economic policies by the EU and other EU governments ten years before the crash(remember the Dutch Minister for Finance berating us about our recklessness?). Richard Bruton warned in the Dail that the Celtic Tiger was built on internationally traded goods and services (real wealth creating jobs) but those jobs were being lost and replaced with construction sector jobs (non real wealth creating).
So, we had pro-cyclical economic policies (tax reductions and massive increases in pensions, welfare and Public Sector pay and numbers), no competent oversight of financial institutions by the Financial Regulator, a Ministry for Finance which was excluded from State financial decision making by the Social Partnership model (and was unfit for purpose anyway) and no Central Bank control or limiting of lending by banks through mechanisms which are currently in place. I can only conclude that most of the crash was our own fault. The tragedy is that we seem to have leaned nothing from it.

 

[TheBigShort]

The State had a responsibility to protect the citizen.

Yes, and it failed. Why do keep diverting the subject back to State institutions when nobody is disagreeing with you? Apparently the individual is also responsible for their actions too? Are the financial institutions not responsible for their actions too?

The State, through the Central Bank, Department of Finance and Financial Regulator, created the Irish system.

That's what I said, it is the system that facilitates these loans.
The system facilitates me to go drink ten pints of beer and a bottle of whiskey if I want. Doesn't mean I have to do it, or that I should not be held accountable for my actions if I do drink all that alcohol.

 

[T McGibney]

Would there be though? We hardly built a house for 8 years. Without the bubble and crash we'd still have functioning construction and banking sectors. Would we not have managed to build those 200,000 houses, and more, over the last 8 years?

True perhaps in respect of banking, but I'm not too sure in relation to residential property construction.

The powers-that-be in Ireland have always resented housebuilders & property investors doing well. They did their level best in 1998 to torpedo them through the ideology-loaded Bacon Report measures. These of course backfired spectacularly, triggering a housing crisis that was only defused when McCreevy eventually did a uturn and abandoned them. The begrudgers saw their chance post-crash in 2009 and fooled poor Brian Lenihan into adopting even worse measures that did away with new residential construction and investment for good.

Since then there has been barely a house built, and homelessness is rife.

It's highly likely that this would have happened with or without a boom and bust. Never underestimate the tendency of Irish policymakers to shoot themselves in the foot while commending themselves on their virtue.

 

[Purple]

Are the financial institutions not responsible for their actions too?

Yes. Not just the financial institutions but the individuals within them.

That's what I said, it is the system that facilitates these loans.
The system facilitates me to go drink ten pints of beer and a bottle of whiskey if I want. Doesn't mean I have to do it, or that I should not be held accountable for my actions if I do drink all that alcohol.

Exactly. The banks were responsible for their actions and the punters for theirs. All were failed by the State. The only people who suffered were the shareholders of the banks and the punters who bought the houses. The real decision makers are still in most of the banks (the boards are mostly window dressing) and nobody employed by the State suffered any sanction whatsoever.