The first part of this blog was written about how the seeds of the current recession were sown as well as why and where the recession had slowly and almost inevitably began to grow. In that blog both Ronald Reagan and Margret Thatcher (with both of their respective administrations), were named as the two entities most responsible for the removal of the regulatory legislation (red-tape). In part one of the blog it had been written that the banking crisis was in essence, a viral disease of heavy debt which had now become contagious. The banking crisis for the confused: Part 1 can be viewed below.
Here in Ireland, in recent times when something has gone wrong in our banking system or economy we are told that “it is due to international factors” or we get told “the international banking crisis is the cause of our financial problems” but if this is the case why is it that the Irish economy has taken such a severe nose dive when compared to other countries… Well Ireland did have many of the same problems that other countries had. Some of these problems were; a serious lack of oversight by financial regulatory agencies, banks had gotten entangled in a web of bank-to-bank loans, many people were in serious personal debt and were not ready to pay-off their debts when the recession came and also, many other countries also had large numbers of people loosing their jobs.
However, Ireland is a special case because of how our government (and opposition) had failed us, how our economy was geared, how our banks were miss-managed and how our media had misled us. This is where the concept of the Irish stew comes in, all the special ingredients mixed in together to give a unique taste… When Fianna Fail came into power they inherited a strong and growing EXPORT BASED economy, which they then mishandled leading to the industrial – manufacturing base becoming non-competitive (2000: Ireland is the 5th most competitive economy in the world, 2008: Ireland is the 22nd most competitive economy in the world), which led to the slow and inevitable loss of manufacturing jobs much of this happened under Mary Harney’s stewardship of the Department of Enterprise and Trade. The then Taioseach Bertie Ahern (1997-2008) and the then minister for finance Charlie McCreevey (Budget 1999) began to erode Irelands tax base by giving tax breaks to the wealthy. These included developers (people who didn’t really need tax breaks), this error led to the enlargement of a property bubble on which our tax system was based and upon which our economy hung (by a thread). This facilitated the over-growth of the construction industry which was just too large for a country of our size to support.
By the late 1990’s Ireland saw an explosion in property prices, this led to speculation on land prices which drove up the cost of what once was affordable land. What had started in Dublin had become the “done thing” right across the country. The “commuter belt” had become as common a phrase as “Celtic tiger”. Builders began to borrow larger and larger sums of money from the likes of Anglo Irish Bank (the builders bank), so they could build these houses. They then would sell them off with up to 33%+ profit margins! But the developers weren’t actually saving this money; instead they reinvested it back into the market by building more houses etc. This activity was soon to become the “done thing”, the fact was that the developers, bankers and politicians believed that there was a never ending market for these houses as the once sleepy communities of the new commuter belt had now become bustling towns (dormitory towns for those who had to bare the daily slog into Dublin to work).
Meanwhile the price of buying or building a house had shot up… It was becoming impossible to get a decent place to live in the commuter belt, never mind Dublin!! Enter AIB and Bank of Ireland, what were once 70% mortgages (where you provide the other 30% of the money) had now become 100% mortgages (the gun to the head) which had in essence been taken out on properties which in reality were only worth two thirds of what they cost to buy. It is important to note that when you take out a mortgage on a house; you don’t actually own it – the bank does and they will continue to until the last penny is paid for it. This is where the seeds of “negative equity” were sown; this is where – due to market conditions – your house is worth considerably less than what you paid for it. You still have to pay every penny of the mortgage plus interest back to the bank.
The end result was that the construction bubble burst and developers couldn’t afford to pay their debts to the poorly regulated and negligently managed banks… The whole system collapsed like a house of cards with a single gust of wind. I refer to this as “the Irish stew” because it was not due to international factors but to the bad management of our banks, poor decisions taken by our government here at home and the misadventure of the builders. Developers such as Liam Carroll and crooked bankers like Sean Fitzgerald are being coddled while the anxious wait for the NAMA (this one is saved for part 3) legislation to pass in the Dail. But essentially we as a country are now paying for in the form of cuts to services and bail out packages for these banks (with out any strings attached – God forbid!!). This is basically private profit and public liability, i.e. “In the good times, WE get the profit and in the bad times YOU get screwed! ;-D”.
“But sure hold on… why did the financial regulator not step in and put a stop to the bad practices!?” Well the financial regulator didn’t seem to see the problem with it, it was taken as common practice, the done thing… so they, like many more, who should have been sounding the alarm and hitting the breaks, just didn’t. The regulator, the government and the banks all pleaded ignorance when asked why they hadn’t warned people of the dangers. They then tried to shift the blame onto the “little people”, Brian Lenihan said, “We as a people decided collectively to have this boom”. A suitable response the “little people” might give would be, “and you as a government decided collectively to run that boom into the ground”…
So, many Irish, blind folded, began to slide into personal credit debt, had large mortgages, negative equity on their homes, this was all capped off by a global financial crisis, a perfect storm… To compound all of this, there are now heavy taxes, brutal cuts to services, major scale unemployment (440,000+), wage reductions and the threat of redundancy hanging over them. Meanwhile the geniuses who made the mess are walking away with golden handshakes, bulky pensions and a pat on the back for good measure.
By September of 2009 an agency known as NAMA operating under the control of the Treasury department will be installed to take bad debts from the banks at very generous prices and all at the expense of the Irish tax payer.
The third part of this blog will be coming soon…
Thanks for reading,
Colm J. Carrigg.
