Banking and economic crash ‘should not have happened’

Ex Central Bank chief economist at inquiry

Ireland's banking and economic crash should never have happened, the Central Bank of Ireland's former head economist Thomas O'Connell has told the Oireachtas Banking Inquiry.

“[It] should never have been allowed to happen with all the consequences of huge increases in unemployment, rising emigration, enormous debt, suicides... that we have seen,” Mr O’Connell said in a hard-hitting opening statement.

Mr O’Connell questioned how independent the Central Bank was in the period before the crash in late 2008 and said the boards of both the bank and the financial regulator were “heavily weighted with political supporters of Government”.

It was his experience that “any concerns or issues raised by staff for airing in the public arena were invariably watered down so as not to reflect adversely on matters of concern to Government”.


Mr O’Connell said it was “difficult to get views through that might impinge on vested interests”.

“ For example, as land and property prices escalated to bizarre and absurd levels, I had written, in a low key way for the bank’s comment in its quarterly bulletin, that there was a need to consider the issue of rezoning more land for building in order to increase housing supply.

“That was blocked from reaching a higher level in the bank in the light, in my view, of political and property interests on the bank’s board.”

He said that as the demand mania for property took off against the background of restrictive zoning, which limited the supply of housing, the inevitable result was huge property price inflation.

Mr O’Connell said the Central Bank had “little or no contact” with the Irish banks in the years before the crash. This contact was handled by the Financial Regulator at the time, which was responsible for prudential oversight.

“Further, in the bank, we had no knowledge of the large exposures of the banks to individual developers; such data were rigorously concealed from my level in the bank,” he said.

Mr O’Connell said it was “completely incorrect” to suggest that “nobody seemed to know that a property boom/bubble was developing”.

“While the Central Bank in its public utterances presented a low-key assessment of what was happening, that is not to say that it was not fully aware of the major excesses,” he said.

Mr O’Connell said one member of the Central Bank’s board did have “grave doubts” about what was happening. “His words ring in my ears to the effect that ‘it was all a house of cards and would all end in tears’,” he said. “However, his views appear not to have had any impact on policy-making in the bank.”

He said the authorities should have been working assiduously behind the scenes to curb the huge excesses and reckless lending of the banks.

Mr O’Connell recalled that in 2002/03, a memo was sent from the economics function in the bank to the then Governor recommending that lending to the property sector needed to be “reined in”.

“The response to the note was that the governor would have to consider bringing the proposal to the board. However, at the top of the note were the words, evidently added subsequent to the first comment - ‘That is out of the question’.”

More generally, Mr O’Connell said at staff level in the bank, people were fully aware of the “huge excesses of the property mania”.

Mr O’Connell said the authorities at the time simply did not wish to do anything about this situation.

"When Professor Morgan Kelly wrote about the probability of a crash, he was derided and literally shouted down at an economics conference where he was presenting his views on the property market," he said.

Mr O’Connell suggested the capital markets divisions in the banks were “in fact well aware that we were experiencing a property bubble”.

“Why else would the two main banks have decided to sell off their headquarters buildings and major landmark branches at colossal prices at the height of the bubble?” he asked.

Mr O’Connell noted that in the critical period from 2000 to 2007, when the property mania was at its height, none among the top three executives in the Central Bank was an economist.

“This would have been less of an issue if there was a willingness to listen to the views of economists,” he said. “In addition, the Financial Regulator employed very few economists.”

Mr O’Connell said it was “crystal clear” that, from about the turn of the millennium, Ireland was experiencing a major property bubble.

"It is not credible that those who ought to have been aware of what was happening were in the dark," he said. "One can only surmise that, as Professor Alan Ahearne has said in evidence to your committee, too many people were benefiting from the boom-time for prudent, avoidance measures to have been taken.

“Such necessary measures would not have been popular, but that should not weigh with those whose duty it was to ensure that the country did not experience the catastrophe that we have so painfully and unnecessarily suffered,” he said.

Mr O’Connell joined the Central Bank in 1970 as an economist. He was appointed assistant director general of the economics division in April 2005. He retired in 2010.

Ciarán Hancock

Ciarán Hancock

Ciarán Hancock is Business Editor of The Irish Times