Cormac Lucey: Honohan report
The Honohan report blames politically weak Irish targets for a European problem, says Cormac Lucey.
Brian Cowen should feel sore at the conclusions of the Honohan report. At a political level, voters were going to blame Cowen for our economic debacle anyway. But Cowen might have looked to Honohan's expert report to, at least, show how the bulk of our crisis derived from international factors.
After all, is it a coincidence that exactly the same pattern of crisis has been simultaneously visited upon Ireland, Spain, Portugal and Greece? For more detail, google the March 2008 OECD paper Monetary Policy, Market Excesses and Financial Turmoil. The graphs on pages 18 and 19 of the report show very strong correlations between the monetary boost the EMU imparted to individual euro zone states and changes in housing investment, house loans and house prices in those countries. In some graphs, the correlation coefficient exceeds 0.80, indicating a very high correlation indeed.
The OECD noted that Ireland's short-term interest rate deviated by more from the norm than in any other country. Tellingly, the other countries which had deviations so large that the authors separately noted the fact were Spain, Portugal and Greece. Before becoming Central Bank governor, Patrick Honohan seemed to go along with the view that cheap European Monetary Union interest rates had played a major role in our boom. Honohan's May 2009 article "What Went Wrong in Ireland?" concludes with the summary: "Among the triggers for the property bubble was the sharp fall in interest rates following euro membership: within the euro zone also, the disciplines of the market which had traditionally served as warning signs of excess were muted. Lacking these prompts, Irish policymakers neglected the basics of public finance, wage policy and bank regulation."
A year on, Honohan is Central Bank governor and a member of the governing council of the European Central Bank. Now he must uphold the EMU. And now - surprise, surprise - he overlooks the EMU when allocating blame. Instead, he concludes that our financial crisis was largely "home-made". How convenient.
Honohan is no longer an independent academic employed by Trinity College. Today, he is Governor of the Irish Central Bank, employed by and answerable to the board of directors of the Central Bank and Financial Services Authority of Ireland (CBFSAI). It is in that context that we must consider Honohan's criticism of the boards of directors of our commercial banks. Honohan correctly concluded that, "in an important sense, major responsibility lies with the directors and senior managements of the banks that got into trouble."
But is it not rather convenient that Honohan fails to criticise the board of the CBFSAI? Was the CBFSAI board not as responsible for the well-documented failures at the Central Bank and the Financial Regulator as commercial bank boards were for the well-documented failures at the banks?
By the way, this was why Honohan had to ignore Ray O'Rourke's Financial Services Consultative Consumer Panel. Giving credit to the panel's useful advice would have required attaching blame to the board's contrasting uselessness.
Honohan trots out the well-rehearsed argument that Government revenues were overly reliant "on construction-related and other insecure sources of revenue". And he simultaneously criticises Government tax breaks for the construction sector. But either the Government was collecting too much in taxes from the construction sector or it was collecting too little. How could it simultaneously have been doing both? In this matter, Honohan can be accused of pandering to a public which would prefer to be presented with a list of the guilty than bother itself with intellectually coherent analysis.
It is noticeable that Honohan, a former advisor to Garret FitzGerald, has been politically cute in his choice of targets. He has brutally exposed the shortcomings of those who are already politically bust - such as past regulators, past bankers and past-it politicians. But he has artfully avoided criticising any interest that remains politically powerful, such as the European Monetary Union, the board of the CBFSAI or social partnership.
The intellectual justification for Honohan's central conclusion is a graph on page 32 of his report. He projects what Irish economic growth would have been between 2007 and 2010, had we enjoyed the same rate of growth as the euro zone 16. Comparing the two, he then concludes that "about three quarters of this (Ireland's loss in economic output) can be attributed to local factors". That analysis ignores the varying effects of monetary, fiscal and regulatory policy in different euro zone member states.
It is a primitive pre-economics form of analysis by crayon that ignores every conceptual economic advance of the last century. It hardly amounts to even cursory economic analysis. But like a matador's sword, it is sufficient to destroy the last shred of Brian Cowen's political credibility. If Cowen had sufficient intellectual interest, agility and energy to truly comprehend what is going on, he would be outraged. But he doesn't and he isn't.
This is a highly political report cloaked in the form of expert economic analysis. It is about finding Irish culprits for a European problem. It is about identifying scapegoats so that we can imagine that the financial stable door will now be bolted for ever more. But the fast rising cost of Irish Government debt shows that the EMU stable door is wide open. It may yet be blown off its hinges.
