SCATHING AND incisive reports into the causes of the banking crisis and economic recession have ranged widely in their fault-finding. Departing from the strict terms of reference set down by Government, Central Bank governor Patrick Honohan found that Fianna Fáil-led governments contributed in a major way to the creation of a property bubble while the public was led to believe the party would last forever. Similar conclusions were reached by international banking experts Klaus Regling and Max Watson.
By focusing on the role played by fiscal policy in bringing about a dramatic fall in living standards, Prof Honohan has signalled an abrupt end to the traditional subservient relationship between the Central Bank and Government. Just as the new Financial Regulator Matthew Elderfield ignored political pressures when dealing recently with Quinn Direct, the Central Bank governor has used his statutory independence to lay blame where it is due. That is a welcome and refreshing development.
On three occasions in recent weeks, Taoiseach Brian Cowen sought to defend the actions and policies he pursued while serving as minister for finance. His justifications look lame and threadbare in the light of these reports. They conclude that our problems were largely home-grown and distinct from the international credit crunch. The Government’s contribution came through a shift to cyclically-sensitive taxes, a narrowing of the tax base and growing uncompetitiveness, even as State spending rose sharply. The outcome amounted to a slow-motion train crash as the property bubble burst; the banks became insolvent and Government entered a period of deep denial.
There can be no disguising the failures of the Central Bank, of the Financial Regulator and of the directors and senior managers of major financial institutions. Fault, however, has not been laid specifically on the shoulders of individuals. In traditional Irish fashion, failures of judgment and of intervention have been treated as “systemic” within Central Bank structures, arising out of complacency and, at times, from an unduly deferential approach towards the institutions they were meant to regulate. As for the commercial banks, their boards and senior managers were found to carry the major responsibility for the crash. Auditors and accountants should also have been more alert.
These two reports were designed to provide the terms of reference for an independent commission into the banking crisis, as demanded by the Opposition parties. Their terms of reference were deliberately designed to steer critical analysis away from government policy. In that attempt, the Government failed spectacularly. It is difficult, therefore, to see what additional public benefit an independent commission can now provide, particularly as it would conduct hearings in private. Inquiries take too long and cost too much. At the end of another exhaustive process, would anyone be held accountable? There is sufficient detail in these reports to establish what went wrong and why. They show that those responsible for the banking crisis still hold positions of trust.