Review of Banksters by David Murphy and Martina Devlin (Hachette, 2009)

In Banksters, RTE business correspondent, David Murphy, and Martina Devlin, columnist with the Irish Independent, seek to chart the rise, collapse and rescuing of the Irish banking system. The story they tell is split into four parts – the origins of the crisis, an overview of each of the banks and the key banking officials, the crisis, and the fallout. Their tale can essentially be boiled down to the following:

1) In the early 2000s, Irish banks stopped using their deposits to underpin loans and started to borrow money from other (international) banks and to offer easier forms of credit to home buyers (such as 100% mortgages over longer time spans) and investors (such as deferred interest payments).

2) Property prices, especially development land spiralled exponentially and unsustainably upwards (and did not meet stress test criteria) and yet the bankers kept lending money to developers driven by personal bonus schemes and inter-bank rivalry to generate record annual profits.

3) Regulation was very light and the financial regulator failed to intervene in poor and suspect banking practices or overheated property speculation; the Irish Central Bank could not directly influence consumer spending as it did not have control of interest rates (which resided with the European Central Bank); and the political establishment were in cahoots with the developers and were not only blind to the potential problem but poured scorn on anybody who tried to warn of the impending disaster. Crony capitalism was in full swing.

4) As property markets slowed and financial crash hit, international banks stopped lending Irish banks money.

5) Banks thus didn’t have funds to lend to investors and businesses, nor did they have the means to pay back loans to international banks.

6) This prompted a share price collapse. (Between May 2007 and November 2008 Irish shares fell in value from €55b to €4b).

7) Which in turn spooked depositors who, worried that the bank might fail, withdrew their deposits to move them to a more secure institution.

8) This took all the liquidity out of the Irish banking system and reduced the share price further.

9) A run on the banks thus became inevitable without intervention which, given that the Irish government had decided that the banks could not be allowed to fail, came in the form of the Irish government underwriting the entire banking network (to the tune of €440b), thus halting the outflow of deposits.

10) By guaranteeing the banks, the Irish government in turn put the country’s future on the line, making tax payers liable for all bad debts.

11) Once the brake was in place the Irish government needed to decide how to proceed to put liquidity into the banking system. Initially it wanted to avoid recapitalisation and nationalisation and instead it tried to force mergers between financial institutions to gain economies of scale and to recapitalise the banks through private equity investment.

12) Ultimately though it had to nationalise Anglo-Irish Bank and partly recapitalise the others, taking the role of a preferred shareholder, and also created NAMA (National Assets Management Agency) – the world’s largest, state-owned, property portfolio - to take the bad debts off the banks' books.

For the rest of the review see Ireland After NAMA blog.

From boom to bust

Just three years ago Ireland was the place that every developing country wanted to emulate. It had transformed itself from a poor, peripheral country on the edge of Europe (in 1987 its GDP was 67% of the EU average) to one of the richest nations on the planet (with a GDP 139% of the EU average in 2004). For over a decade GDP growth per year was over double that of nearly every other European country. Employment rose from 1.16m people in 1991 to 1.99m people in 2005, and unemployment dropped from 15% in 1993 to run at about 4% between 2000-2005. Standands of living and quality of life rose rapidly, as did propert prices, and the population grew by 17% between 1996 and 2006 (from 3.62m to 4.23m). In turn there was a cultural transformation away from social conversativism to liberalism and consumerism. Ireland seemed to be a conundrum with low personal and corporate taxes, high indirect taxes, yet with a public health system and free education at all levels - to use Mary Harney's phrase it resided 'somewhere between Boston and Berlin', blending European social welfarism with American neoliberalism. And then the global financial crisis occured and Ireland's boom rapidly heads for bust with plummeting house prices, rapidly rising unemployment, personal tax hikes, and salary cuts across the private and public sector.

In 2006 I co-edited 'Understanding Contemporary Ireland' with Brendan Bartley. The book consisted of 22 chapters examining all aspects of society and economy, written by a collection of leading social scientists, all of whom challenged the myth that the Celtic Tiger had done nothing but good and were sceptical as to government policy and the sustainability of the economy. I don't think any of those writing anticipated the wheels coming off Ireland Inc. quite so spectacularly though. We were probably all hoping for a soft landing even if we feared the worst. What we're experiencing is anything but soft, although it's still a long way from Iceland's demise (and certainly the joke that Ireland was Iceland but for one letter and six months has not come to pass). I thought it was about time I got beyond the newspaper reports and started to read some of the analysis that seeks to explain what went wrong. To that end I went and bought a number of books over the weekend (from The Reading Room) which I'll be reviewing over the coming weeks as I get myself back up to speed with the state of contemporary Ireland.







I'm also co-organising a one day workshop on Nov 23rd entitled 'Geography after NAMA' (the government's plan to buy the bad property debts off the banks) and it'll be interesting to see what other social scientists make of what is occuring.