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  • irishtimes.com - Posted: June 25, 2009 @ 2:14 pm

    The Boom – what it really meant.

    Harry McGee


    A couple of years ago after yet another glowing IMF report about Ireland, the then Taoiseach Bertie Ahern famously commented: “The boom is getting boomer.”

    It was always goingt to be a spectacular boom. But there we were thinking it was all to do with economics when it was about the deafening noise that was made when the bubble burst.

    Two reports were published yesterday. The IMF report is the one I read in detail (it’s very well written – you can download it here).

    I’m not going to dwell on its finding but there are a couple of interesting arguments and points that the IMF raises:

    To wit:

    1. A gloomy prediction on the economy – a contraction of 13.5 per cent between 2008 and 2010

    2. Evidence that  competitiveness has been in decline since 2002. In fairness to Richard Bruton of Fine Gael, this is a theme that he doggedly pursued between 2002 and 2007. Bruton also called for the scrapping of benchmarking as early as September  2003. So when the Government say that Labour and Fine Gael didn’t question the fundamental during the good times, it is wrong.

    3. A quote: “Well before the crisis hit, public finances had developed serious structural weakness. The facts are well known. In the boom years, personal income tax rates were lowered and expenditure grew rapidly (at about the highest pace among OECD economies). Buoyant property-related revenues (stamp duties, VAT and capital-related taxes) masked the growing structural devicit, which reached 12.5 per cent of GDP in 2008.”

    The unmistakable tenor of the IMF’s commentary is that the economy was poorly managed, especially in allowing the property spiral continue, between 2004/5 and 2008. And who was the Minister for Finance at the time? Brian Cowen. He kept on talking about a “soft landing” for the property market but did litte about it. He talked about reform of the public service but did little about did.  Politically, to employ the cliche, the buck stopped with him.

    4. However, the IMF does say that the Government was probably right with the recapitalisation of banks, and the use of the NAMA model to buy up banks assets, distressed and tood. Some of the IMF’s conclusions in this section are sobering. With regard to the banks, it estimates a potential exposure of €35 billion of bad debt (more than the Exchequer will bring in in all revenues this year). Worryingly, too, it warns of that economic oil slick dispersing over a wider area to other classes of loans… the potential of loans which are not property-related becoming distressed.

    5. Different political parties took different things out of this section. The IMF argues that temporary nationalisation of banks might be a good gambit. It argues that it might be the only option “where the size of its imparied assets renders a bank critically undercapitalised or insolvent”.

    Labour used this section  as justification for its nationalisation call, which it is, but isn’t as fully as Labour might want us to believe. The Government used this section as justification for its setting up of NAMA, which it is, but isn’t as fully as the Government want us to believe.

    6. Among the “consolidation strategies” (ie cutbacks) are ones that you would expect from the IMF. They include staff and wage cuts in the public sector; a widening of the tax base; plus more means testing. The latter will definitely lead to means-testing of child benefit (I have long argued that there is no justification for the universal availability of this). And it will also give the impramatur to the reintroduction of third-level fees. I, for one, have never opposed third-level fees. Where most State money should be applied in the education sector is at the earliest stages, where stamping out inequality would make the most difference. For middle class families in Ireland the scrapping of third-level fees meant that they transferred their resources to second-level, leading to a boom for the private education centre.

    This blog has said on a number of occasions that the strategy pursued by Government since last September is no better or no worse than that pursued by other governments. The decision to guarantee the banks left no room for contemplation. Should Anglo Irish have been included back then? Was there a danger that if it was allowed collapse, could it have taken AIB with it? Is NAMA right? Should the banks have been nationalised? Should Anglo Irish have been nationalised in January?

    The decisions of Governments  (taken in haste and in an atmosphere of great urgency) have led to problems? But if the actions had not been taken, or if alternative actions were taken, would that have led to other problems, of equal or greater magnitude?

    For example, the Government says that if nationalised AIB and Bank of Ireland it would send out the wrong signals?

    There is also a strong message consistently put out by Government that we must honour the rights of bondholders in Anglo Irish (and presumably in other financial institutions). There is a distinct lack of information available on why this situation should pertain. Who exactly are the bondholders? Why can’t we default on their investment? Does it mean that the money that is ponied up by bondholders is risk-free? When a bank is insolvent can’t a government say to to a bondholder, we can give you a certain percentage but not the full 100 per cent?

    • Liam says:

      The Anglo bond holders should not be protected and should queue up with everyone else in the bankruptcy court, they were “smart” people and should not benefit from the socialisation of losses. It really is a moral travesty that innocent citizens are being hung out to dry to protect these clowns.
      The domino argument doesn’t hold any water, if the govt. had not taken on these liabilities they would find it much easier to raise money now if they needed it.

    • Betterworld Now says:

      The IMF prescription adopted throughout Latin America in the 1990s in response to their credit crisis resulted in the situation where now the majority of LA countries are unwilling to follow the neoliberal capitalist model and are actively seeking alternatives.

      Already nine countries are full members of the Cuban-lead ALBA socialist free trade area with another five in accession talks. It has its own development bank, TV station and mutual defense agreement.

      Perhaps a future Irish government will open accession talks with ALBA – The Bolivarian Alternative for the Americas? This would be a fitting reflection of our greater closeness to Boston than Berlin.

      The IMF and its supporters in Ireland are playing with fire and they don’t realise it. The Irish political elite continues to sleepwalk into social upheaval and potential revolution on the basis that the current crisis is cyclical. It is not. It is structural and responses to it need to be structural.

      Rearranging deckchairs, even with IMF consent, is not an option.

    • Des FitzGerald says:

      Let’s get real here. This is Ireland – you know, the most corrupt country in western Europe by far. Worse even than Italy.

      So once we agree on that we can also agree that no one in their right mind actually believes that when Clowen and Co sit around the cabinet table they make decisions based on what is the right thing to do or in the country’s best interest.

      The first issue they consider is how their decisions affect the people who give money to Fianna Fáil and what they would do if the government does something to harm those peoples’ interests.

      Then it considers how decisions will impact on FF, especially if there is an election in the offing. So what we have now is Clowen making decisions on the basis of how he thinks they will affect the Lisbon vote – not whether the decision is right or wrong.

      Look at Clowen‘s utter inability to hold judges to account on pay and the fact he has talked about reduced Oireachtas pay and pensions and expenses but has not actually changed them – I mean, how hard is that to do? A manager in a firm going down the loo would have signed off that memo by 8am when he arrived at the office, yet here we are at the lunchtime of Clowen’s term and he still hasn’t taken his coat off.

      It’s not just a new government we need, it is a fundamentally new system of government and civil life in this country. It’s like buying a house that you think just needs new wallpaper, only to discover once you move in that actually it is condemed and needs to be pulled down.

      Brian Clowen and Enda Kenny (as honest and personable as Kenny is) simply do not offer this sort of change and that is the real shame for Ireland and the generation to come who will be paying for the corruption of Charles J. Haughey which led to the Ahern decade.

      What is it about the Irish that we haven’t stormed Leinster House and thrown the lot of them out the window?

      Maybe it wouldn’t have been such a bad thing if the IMF had come in after the last generation of FFers ruined the economy and took us by the scruff of the neck, rooted out all the scams in the public sector, got rid of the dead wood and also tackled the excesses of the private sector.

      If Clowen and Co keep it up, the IMF might get that chance after all.

    • Peter B says:

      Policies pursued by FF and the PDs from 2000 onwards set the seeds for the current structural deficit. Cowen must surely be one of the worst finance ministers in history and yet he is now Taoiseach – astonishing really! I get the impression that Brian Lenihan is fed up with him!

      Competitiveness in the Irish economy has to be regained and there is no easy way of doing this. We have had a situation (and still do) where factors of production were too expensive relative to outputs (export value). Steps to restore competitiveness in the private sector is evidenced by the unemployment numbers and pay cuts for many still in employment. The public sector must follow suit – public sector employees are overpaid relative to the private sector and their counterparts in other EU countries. There is also evidence of over-staffing, particularly in organisations like the HSE and the myriad of quangos. This imbalance MUST be addressed. The cost of doing business in Ireland also has to be looked at – energy and rental costs are particularly steep. Has anyone noticed the endless lines of ‘to let’ signs along most of the streets in Dublin?

      Decreases in rates of taxation from ongoing streams (income taxes) were too generous for the size of our population and workforce and increases are now inevitable. If we want an excellent public service infrastructure, then it must be paid for. The FF/PD tax reductions of the past decade were a total nonsense, fuelling inflation and lulling people into a false sense of security.

      There must be continued investment in education, but standards at third level must be improved. If Ireland wants to have cutting edge jobs, lead in R&D and so on, the skills must be provided by the third level sector. I am dubious about the value added by some third level institutions.

      The Irish mindset must change. People must realise that when there is equity and fairness in society, it benefits everyone. Greed and individualism work against the greater good of society. The cronyism and ‘cute hoorism’ mentality has to go and can no longer be applauded – it has clearly done much damage to this country of ours. The potential for greatness is there, but it requires effort from all quarters to make great things happen.

    • dealga says:

      A comment that starts with a call to get real, then wonders why ‘we’ haven’t stormed Leinster House…

      Maybe while we’re dusting off our pikes and pitchforks we might remember that a very hefty proportion of the populace has just as much to answer for.

      Where now are the sages in every work canteen, pub, hairdressers and golf course that were obsessed with the supposed value of their property and talked of little else, treating the property supplements as the porn there was no shame in looking at?

      Where are JP Morgan’s neighbours? The green-eyed monsters buying property in countries they couldn’t find on a map to add to their multiple shoebox properties furnished on the cheap and rented back to the Eastern Europeans that built them, and all mortgaged against each other for good measure?

      What government forced suits and housewives to buy their disgusting and unnecessary SUVs?

      Why did weddings costing literally tens of thousands of euro for inedible food, crap bands and dodgy DJs become de rigeur?…

      Why did we pat ourselves on the back and tell the world how great we are when thousands of event junky rugby fans spent thousands of euro buggering off to the south of France (or wherever) every Spring to watch the one sport that makes far more sense when watching it at home on tv; then sneer when the French, frankly, displayed far more sense?

      Why did we boast about our Christmas shopping trips to New York and bask in the glory of the non-plussed checkout assistants being nice enough to tell the hacks sent after them what mad spenders we were?

      But of course everyone now denies it. It wasn’t *us* but *them* that were at it. *We* are all just ordinary, hard working people struggling to make ends meet being shafted by the government and the bankers. Right.

    • Liam says:

      Very good Dealga, but it seems perfectly reasonable to suggest that the Government has the ability to make their populace drunk, so to speak.

      Yours, debt-free since 2003

    • Darren Prior says:

      Very good article Harry…!!!

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