Lack of expertise in banks 'could see property bubble repeated'

The lack of obvious economic expertise within the Irish banking sector increases the likelihood that Ireland could see a repeat of the property bubble, a leading economist and member of the Seanad has warned.

Dr Sean Barrett of TCD said that economists within the Irish banks distanced themselves from the wider economics community and became promoters of the property boom prior to the economic crisis of 2007 on and he noted how this contrasted with the situation in earlier decades.

"The close links between the Irish banks and the academic community weakened considerably in the lead in to the crisis. The generation of university economists who served on bank boards such as Louden Ryan, James Meenan and Patrick Lynch was not replaced in the following generations."

Speaking at the Dublin Economics Workshop 37th Annual Economic Policy Conference held in Cork, where he delivered a paper entitled Thinking about Bank-Property-State Nexus – a view on the Banking Inquiry co-authored with Dr Charles Larkin of TCD, Dr Barrett outlined his concerns,

The only independent member of the Banking Inquiry Committee, Dr Barrrett said the interesting thing about the bank-property-state nexus relates to how it went from something unpleasant and economically detrimental in the 1970s onwards into something economically devastating.

“The economy was undone by hot money inflows, untrammelled or regulated by a monetary union without a banking union and a series of cheerleaders on the side-lines such as the Central Bank and the civil service and the media at large,” he said.

“Ireland’s economic system had in-built weaknesses that could only become debilitating diseases when enabled by plentiful and cheap credit. Obviously the banking inquiry has to come up with a policy solution to prevent that predisposition from returning as a problem,” he added.

What will be of particular focus will be the deep regulatory capture as witnessed by the sins of omission committed by the Central Bank and the civil service who were willing to be captured by interest groups partly due to the political economy of Ireland but also due to a lack of expertise.

Dr Barrett pointed out that a report in 2010 found that only 39 of the Department of Finance's 542 staff were economists trained to a Masters level or higher - less than 10 per cent of the department's total staff whereas the equivalent figures in Canada and the Netherlands were 60pc and 40pc respectively.

While that lack of expertise was evident going back to the early 1990s during the early stages of the EMU negotiations, the media also played a part through cheerleading the overheating property market, he pointed out.

“The media’s reliance on property advertising revenue was similar to the Department of Finance’s reliance on Stamp Duty and VAT receipts. If the property house of cards toppled then the entire edifice of the print media would be placed in jeopardy,” he said.

The inclusion of a media component in the banking inquiry is based on a belief that property supplements propped up advertising revenues of newspapers that in turn became too reliant on the sector for advertising revenues, he said.

"The banking inquiry has at its core, the idea that it will discover the reasons why the Celtic Tiger failed so dramatically and how the banking-property-state nexus resulted in the guarantee, the bailout and the protracted period of high unemployment, low growth and fiscal austerity since.

“The less generous understanding of the Banking Inquiry is that it is a calculated programme of political theatre that will report, if it ever does, in the closing months of this government and remind the Irish voters of the role of the Fianna Fáil- Green coalition in the collapse of the Irish economy.

“The problem with both of these assessments is that they are both true and false. The banking inquiry will look to find ‘the smoking gun’ in the crisis. The problem is that so many exist that the process would fall in on itself under its own weight.”

The actual scope of the inquiry is broad and an expert panel had estimated that the original terms of reference would mean it would have to conduct hearings lasting 336 hours - or some 42 days sitting eight hours each day - before the media component was added, he said.

While 42 days may not seem a very long time now, the inquiry is likely to end up taking second place to attendance at votes in the Dail or Seanad and to canvassing on doorsteps for TDs or Senators pursuing seats in the Dáil when when the next general election comes around, he cautioned.