Brian Cowen: An Innocent Abroad
Brian Cowen delivered a defence of his time as Minister for Finance last night that was longer than many of Samuel Beckett’s later plays.
Running at over 7,000 words, you can’t accuse it of being shy of verbiage. If you want to read the entire opus, you will find it here. If you want a good abridged version, whittled down to about 1,500 words, see page 7 of today’s Irish Times (or read it here)
The funny thing is that for all its length and volume, the speech is very selective indeed. There are two traits that Cowen will never let go off… his refusal to admit mistakes and his partisan instincts (usually express in terms of unwavering loyalty to Fianna Fail).
The speech started off surprisingly enough, an admission of an overblown housing market and a mood of unbridled greed within the banks. He accepts that even in the absence of a global crash, they would have needed to be addressed.
“To suggest othersiwe would, in my opinion, to be to bury one’s head in the sand.”
That’s promising isn’t it?
For the rest of the speech, the perspective seems to be coming from that very vantage point, about six inches below beach level.
The first bit of excusery comes a couple of paragraphs later.
“It is, however, important to note that no one in the independent authorities ever advised the Government that the capital adequacy was not sufficient or that higher capital adequacy ratios should not be imposed.”
That is deeply worrying. Correct me if I’m wrong. But the political culture and decisions that had led to such lax captial adequacy ratios and requirments in the first instance were driven by Government, which relaxed all kind of rules to faciliate credit expansion and also to make sure that nothing stood in the way of the growth and progressin of the IFSC. (That’s a separate cluster of nettles.)
The Government also encouraged light-touch financial regulation. That was a disaster and Cowen grudgingly accepts it in a passing reference. I had a story a couple of weeks ago about an expert advisory group which was helping the Government draft new legislation on regulation. (See the story here). The group was composed of the great and the good of the banking and finance industries. What they were essentially doing was drawing up a new law that would allow what amounted to self-regulation. In a sense that was like calling in the vintners and asking them to draft the licencing laws.
And Cowen can’t argue that that this initiative for new laws on financial regulatoin followed from advice. It was driven by him and by Bertie Ahern and prioritised by Cowen in 2006 and 2007. He boasted about it being his initative and his priority on quite a number of occasions.
The legislation was hastily dumped by Government when the county was avalanched by the big bank botch-up of September 2008. The expert group, headed by Padraig O Riordain, managing partner of the ubiquitious law firm Arthur Cox, was quietly put into abeyance.
The other thing that can’t be forgotten is that the Government used the once-off windfall revenues from the property boom to finance systemic and ongoing costs (like massive pay increases and follies like decentralisation).
Cowen lists four actions that were taken in 2006. The first was the decision to abolish property tax breaks in Budget 2006. That sounds great. But the property breaks were phased out over a period of three years and did not come to an end until July of 2008. By that time the bottom had fallen out of property and the damage had been done. He also retained property tax breaks for nursing homes, childcare facilities, and private hospitals, park and ride facilities, and the living-over-the shop scheme. So he didn’t get rid of them completely.
Secondly, his brave stance on stamp duty. The PDs did call for an abolition of stamp duty. He resisted that. Fair play to him. That is true. And he’s right that Fine Gael had a bonkers stamp duty scheme in 2007. But then they were in opposition and were as ignorant as the rest of us about the impending shock.
His third claimed actin was his backing of the regulator in the decision to increase capital requirements for speculative property lending from 100 per cent to 150 per cent in 2007. Fat lot of good that did. It is obvious that banks found ways of circumventing the requirement, as there was poor follow-up from the regulator.
The fourth action: 1 per cent of GNP into the National Pensions Reserve Fund. That was a Charlie McCreevy initiative. It was to fund State pensions and designed to stave off a future crisis when the number of retired public servants increases dramatically.
He then goes on to list eight mistakes.
1. Excessive risk taking in banks
2. Over dependence on wholesale funding.
3. Financial regulation was poor.
4. The property tax incentives from the mid 199s should have been abolished many years earlier.
5. Stunning failures of corporate governance in banks. Executives in power for too long.
6. No proper stability risk assessment.
7. Compliance with regulation within banks was poor. Everybody to blame for that.
8. Higher capital requirement for speculative loans delivered too late.
In his concluding comments he says that Government must never again interven in property markets via tax incentives… to a degree that makes possible property bubbles.
That’s a huge admission of a disastrous policy retain mindlessly for too long.
So what lesson has he learned?
Well, that he was right. 100 per cent correct. Never put a foot wrong as Minister for Finance.
His illustration of this?
“The Government in 2006 took decisive and unpopular action to reduce the vulnerabilities of the Irish economy and without this action we may not have been in a position to stablise the system.”
But it wasn’t all that unpopular. The only one of the four actions that might have seemed harsh was the refusal to budge on stamp duty. The other three made no difference, ultimately.
The politician who took charge of running the economy during the worst excesses of the property bubble can’t turn around now and present himself as some kind of a spectator for all the stuff that went wrong.