David McWilliams: crisis was ‘absolutely preventable’
Terrence McDonough of NUI Galway tells committee economy got caught in ‘perfect storm’
The Irish property crash and resulting banking crisis were both predictable and preventable, economist David McWilliams told the Oireachtas Banking Inquiry.
Mr McWilliams said he spent almost a decade issuing warnings that the property market was going to collapse and that money would “fly out” of the Irish banking system when it did.
He told the committee that he wrote more than a million words warning about Ireland’s financial situation and made documentaries to the same effect but ended up becoming a “toxic” figure in official and banking circles.
The banking crash was the result of “bad economic policy”, he said. But it was the sort of thing that “anyone who was trained” could see coming. The panic of September 2008 could have been avoided, he said. “It could have been fixed very early”.
He added: “The Irish banking and property crisis was entirely predictable. It has happened before in many countries. The warning signs were evident many years before”.
Mr McWilliams said property markets expand only with credit, not supply and demand. He told the committee that when the banks ran out of credit they started to borrow money from Germany, France and Britain. He said there was a run on this so-called “hot money” once the crisis started to take hold.
He went on to say that the bank guarantee announced in September 2008 was the right decision because it was the only action that would prevent a bank run. But he added that it needed to be temporary and should have more conditions attached.
He said then minister for finance Brian Lenihan contacted him in 2008 before the guarantee was issued. The economist said he advised the minister to introduce a temporary guarantee, of perhaps two years, to prevent a run on deposits and give the government time figure out the banks’ condition.
But he said he started to worry in October 2008 about the guarantee that was introduced. He had expected it to be “more conditional”, he said, but because of the way it protected subordinated debt, it appeared less like an emergency measure to protect depositors than a cloak to protect bank creditors.
Mr McWilliams said he and Lenihan had about 12 phone calls and two face-to-face meetings between September 6th and October 4th 2008, adding that the minister was using him as a “sounding board” more than anything else. The October meeting was the last time the pair met. After that, Mr McWilliams said, “I found myself back on the outside”.
Mr McWilliams said the crisis started in 2000 and not 2008. He said he warned in the early 2000s about the volatility of the housing market, adding that there is a direct link between ignored warnings and the vilification of those who issued them.
He said in Ireland “we have an inability to accept reality” and that during the lead up to the crisis, the official policy was to “delay and pray”. He said it seemed as if people in power either didn’t understand the significance of what was happening, didn’t have the facts at their disposal or “didn’t care”.
Later Terrence McDonough, an economics professor from National University Galway, told the inquiry that in 2008 Ireland became caught in a “perfect storm” which blew on international as well as domestic fronts.
The Irish crisis, the European crisis and the international crisis all had their roots in globalisation, neo-liberalism, repression of labour and financialisation, he said.
He added that the only way to have dealt with the financial crisis would have been to have seen the storm coming and then prepare for it but in the lead up to the crisis politicians and economists in Ireland seemed to see the world in the same way.