A friend of mine suggested that my comments about the government’s bungling of the banking sector clean were hindsight and that foresight was rare. Well, while I agree that foresight was rare, we saw a mass mobilisation of academic economists against the government’s plan while it was happening. Therefore I don’t believe it’s in any way fair to say that the criticism was hindsight.
The good bank scenario was suggested by many economists. It ties in with the nationalised banking sector proposal whereby an intermediate stage would be a semi-public good bank where depositors could leave their money with some confidence they would suffer from a “Computer says no” shock at the ATM machine.
Advocates included: David McWilliams, Professor William Buiter in the LSE (FT article), Terence McDonough (NUI Galways, article here). More from Buiter here and of course the 46 economists article in the Irish Times. The list of signatories is here and includes Prof Brian Lucey (TCD), Prof Karl Whelan, (UCD), Prof Bernadette Andreosso-O’Callaghan, (UL), Prof Colm Harmon (UCD), Prof Frank Barry (TCD), Prof Kevin O’Rourke (TCD), Dr Constantin Gurdgiev (TCD), Dr Stephen Kinsella (UL), Dr Terry McDonagh (NUIG), Dr Tom O’Connor (NUIM), Tony Foley (DCU), etc. So that’s actually quite a decent number of economists who disagreed with the government’s plan and foresaw many of the problems we’re now encountering.
The bank bailout was subject to a campaign of Fear Uncertainty and Doubt (FUD) spread by Irish politicians. Doubt was introduced by suggesting that celebrated international economists such as Roubini and Buiter disagreed on NAMA. This was a popularised myth. Roubini’s version of NAMA crystalises losses for bond-holders in the banks. That plan was never put into effect as the ECB bullied us into paying almost all the speculators back. NAMA as implemented is totally dumb. Roubini would think it dumb. Krugman thinks it’s dumb. It definitively isn’t what was proposed by the IMF, whose suggestions actually agreed with the 20 economist article. It’s not that the idea of a bad bank is wrong, it’s that it’s half the solution to the problem.
Yet in a culture of anti-intellectualism, politicians and many of the electorate were distrustful of advice coming from academics or journalists. It’s not a new factor in Irish politics. Perhaps it’s universal but I remember the Fitzgerald-Haughey debates of my youth where Fitzgerald was considered too intellectual and obtuse for many voters. Well, abstract problems need abstract thinkers to solve them.
Instead we opted to listen to sophisticated eurocrats with the most horribly vested interests in Eurozone currency stability at the cost of the Irish taxpayer. Hey, everybody’s just doing their job but it’s worthwhile figuring out what motivates someone before deciding to take their advice as unbiased. Coinciding with harsh cuts in public sector pay, the government attacked the “ivory tower eejits” many of whom are highly-paid public sector employees and discounted their advice. It now turns out that government ignored the dept of finance warnings about our overheated economy also. It seems the least credible people to provide economic suggestions or insights are economists. Or at least ones that aren’t employed by the ECB. That pretty much defines anti-intellectualism.
Back to foresight… We setup a bad bank and left the existing banks to “wither and die” , as McWilliams foretold, as confidence in their ability to hold deposits declined. That was always going to be the issue with implementing half a plan. It didn’t reassure the markets. Many commentators have been highly consistent over the past few years in their philosophy, insights and recommendations. This wasn’t luck. It wasn’t a case of a “broken clock being right twice a day”. I’d argue there was no magical insight beyond doing some calculations based on publicly available data AND discussing the issues with foreign bankers who are best placed to explain what’s required to improve their confidence in Irish banks. It sounds obvious but common sense, it appears, is as rare as foresight.
Whatever the new government brings, I sincerely hope they won’t waste more time and public money trying to discredit those who stick their necks out to give them advice.