Lessons have been learnt -- and then quickly forgotten

Here's my piece in the Sunday Independent today.

THE blanket coverage of the election has masked many smaller stories which are just as important as the Fine Gael/Labour bust-up and the electoral immolation of Fianna Fail. Let's go through three of them.

But first, to get a sense of the bigger stories we might be letting slide, as well as the ability of our policy makers to learn anything for very long, let's look at the stories from this month last year.

Last February: the EU Commission approved Nama; the Government did a U-turn on taxing the bonuses of higher- paid civil servants; the expert group on addressing the household debt crisis was formed; Aer Lingus wouldn't give Ryanair Hangar 6 for aircraft maintenance and allow it to create 300 jobs; the Dell taskforce was yet to report, but the feeling was something would be done for the more than 1,900 people let go when the multinational pulled out of Limerick.

The papers in February 2010 were full of fury at the banks' and Nama's forbearance for, and bailouts of, builders and developers; the Greek economy was still the bad boy of the eurozone; Ireland was still in the good books of the boys and girls in Brussels; and the bond markets were our friends.

Iceland was routinely referred to as an example of an economy that Ireland might turn into, were it not so expertly managed by the Minister for Finance and his minions in the Department of Finance. Trinity finance professor Brian Lucey raged in this newspaper and others, arguing for a timely resolution of Ireland's banking crisis by the end of 2010. George Lee resigned his Dail seat.

These were some of the stories we might have missed, if we had had a general election in February 2010.

What are we missing this time around?

Ireland's price level is rising again, after nearly two years of falling steadily. Sustained falls in the general price level are bad because they make the cost of repaying debt more expensive. The Central Statistics Office reports that Ireland's inflation rate is now positive. Except it isn't. Massive increases in energy costs and transport costs account for most of the positive bump. Parts of the real economy where we might expect jobs to come from -- retail and clothing, recreation and culture, restaurants and hotels -- all of these sectors are still seeing price drops across the board. Ireland's private sector deflation is continuing to hammer those in large amounts of debt, as it did last year, and to depress local investment and expenditure.

Perhaps it is the cynic in me, but Nama's positive news dump, covered elsewhere at length in this newspaper, is worrying. We have been waiting for more than 50 days for the latest information on the quality and type of loans transferred to Nama from the banks.

Meanwhile we learn that Nama has approved advances of €592m to developers to assist with their working capital and overheads.

The coverage of Nama's good news for developers has displayed less fury than the forbearance granted the same people this time last year.

Meanwhile, debt levels amongst Irish households haven't been tackled, despite the expert group on mortgages reporting in July 2010. Our savings rate has increased sharply in recent years. We went from saving €1.20 out of every €100 of disposable income to €9.30 out of every €100. By contrast, over the same period in the UK their savings rate barely moved.

A half-mile of taskforce reportage later, last week we learnt the former Dell workers had millions in EU funds earmarked for them, only to have to hand nearly €10m back to the EU in a morass of red tape and blundering.

Former workers enrolled in college courses will have their 2011/2012 academic year paid for them by the Government, but the loss of income to a region experiencing a depressive episode of unemployment because of what seems like bureaucratic incompetence will surely grate.

Professor Lucey's plea to sort out the banks in February 2010 hasn't gone unnoticed, but an EU-wide solution is still a long way off, even 12 months later. The rhetoric of "burning the bondholders" was tempered somewhat last week by a report from Dr Seamus Coffey of UCC's economics department. Dr Coffey did a shameful, shameful thing -- he looked at the evidence on the Central Bank's balance sheets of the national ownership of outstanding bank bonds. The result? Close to half those bonds are owned by Irish people.

There is still an argument for burning bondholders, but it must be carefully considered, because we may be setting our pensions on fire as we go a-burning.

In Ireland, nothing is really ever learnt for long. The same stories repeat, it seems, with differing characters, but with the same plots. Despite the coming wave of new ministers and junior ministers after February 25, do we really ever move forward?

3 Replies to “Lessons have been learnt -- and then quickly forgotten”

  1. Stephen says:

    "Dr Coffey did a shameful, shameful thing — he looked at the evidence on the Central Bank’s balance sheets of the national ownership of outstanding bank bonds. The result? Close to half those bonds are owned by Irish people."

    I wrote a blog entry, which I entitled 'Corporate Tax' a long while ago, in which I theorized the National Treasury Management Agency had become a vicarious landlord to the multi-national companies situated in Ireland, through the 'vehicle' that was Anglo Irish bank. That is, the NTMA was a bond holder of Anglo Irish bank. I theorized, that Ireland was secretly trying to fund the tax breaks it offered to the foreign multi-nationals, by earning back to tax break 'spend' through being a landlord to the same.

    As much of a stretch that arrangement was to imagine in my brain, it still captured something of the real truth and the whole 'circularity' of our predicament. One must try to find a theory, I believe, which fits with the facts of the situation. Even fit the resultant theory looks completely crazy, it cannot be that wrong, if it somewhat fits the facts.

    At present, I am having fun playing around with this new 'Keystone' idea of mine, which equally fits a lot of the facts. It is the last place I would have looked though for a theory that might explain the Irish situation. As professors Iansiti and Levien developed the theory in their Harvard Business Review articles, to try and explain the success of the Adobe Acrobat format. A strategy which revived a failing company, not by taking over vast portions of the software industry, but by positioning itself within the system. This is what we did not do in Ireland. And if one wanted a lesson in all the things not to do, from a 'keystone' point of view, then it would be Ireland.

  2. Much to agree with Steve. However, I think the argument about the nationality of the bondholders is not adding much. If "burning" bondholders is a just thing to do, then it is just regardless of whether those bonds are held by Irish or non-Irish funds. Bailouts still amount to a transfer from the taxpayer to private wealth funds in either case.

    In general, we are going to have to have a serious debate about why we are bailing out some pension fundings (including university funds) with taxpayers money. I am probably going to be a beneficiary (though UCDs scheme is really not in much trouble for some reason) of something like this but it doesn't make me like it or want to see it happen.

    1. I agree Liam, but the political feasibility of it drops away rapidly if you're burning Mrs Murphy's pension fund before Mrs Schmidt's.

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