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Thread: Cowen's speech: An alternative view

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    Politics.ie Member adamirer's Avatar
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    Default Cowen's speech: An alternative view

    Cowen’s record as a Minister for Finance is, simply put, poor.

    Its worth going back to why he got the job. This is all backed up in several books, by Matt Cooper, Pat Leahy etc. FF were hacked off at McCreevy from 1997-2000 because despite the tax cuts and spending rises, they felt he was still too stringent with the purse strings.

    That changed with the 2001 and 2002 budgets, in the run up to the 2002 general election, which had always been McCreevy’s plan. The problem was he hadn’t anticipated the dot com crash and slow down in the economy from mid-2000 that really hit Ireland in 2001. Still, the restraints were off… until right after the election. This was the last time we had a competitive economy based on real taxes and not property speculation. (Even Coughlan admits 2000 was the last year we hadn’t lost competitiveness.)

    McCreevy knew what he was doing was an election winner, but was also a really bad management idea. So as soon as the election was over he started tightening the belts, thinking he had 5 years before the next election to get it right and loosen the strings again (plus the SSIA windfall). However there was a big backlash at what was seen as FF dirty tricks, promising one thing, delivering another, peaking at the 2002 budget. The 2003 one was the same, masked by the media focus on the daft decentralisation idea.

    But FF paid for McCreevys post election u-turn in the 2004 local and European elections. Ahern was already unhappy that McCreevy was prone to doing solo runs and not fully briefing him about budget plans and the result in 2004 was the final straw. He wanted a man in place who would more readily do what he was told and who he could influence more. This is all right from Leahy’s book ‘Showtime – FF in power’.

    Exit McCreevy and his 'relative' caution. Enter Cowen and rampant spending based on windfall (various property) taxes.

    Now the conjecture of Cowen last night misses some very serious points. While he is right to say most here in Ireland were predicting a 'soft landing', he typically ignores the fact that there were many credible voices calling for caution, warning against a buddle, not just here, but in the international media. Even bodies he quoted, like ESRI and the OECD, who did say a 'soft landing' was more likely, heavily qualified their comments with warnings and risk assessment he blithely ignored. I'll list some of them below to support this statement.

    There was massive 'group think' here from people with vested interests in keeping the boom going. Reputations had to be upheld and with the media feasting on massive property advertising income, they were heavily compliant with the 'good news story'. It was in everones interest. Confidence was everything.

    People globally were pointing out this wasn’t sustainable and that Ireland faced challenges. The IMF in 2003 warned house prices had gone too high (http://www.irishtimes.com/newspaper/...274HM1IMF.html)

    The New York Times in April 2005 described Ireland as the
    Wild West of European finance
    in an article about our ‘light touch’ financial regulation. (http://www.nytimes.com/2005/04/01/bu...rish.html?_r=2)

    The Economist ran several articles on the positives and dangers in the Irish economy during Cowen term of office as Minister of Finance.

    Oct 14th 2004 – The Luck of the Irish (but will it last)
    Premium content | Economist.com

    June 16th 2005 – The Global Housing Boom
    Premium content | Economist.com

    The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents…Calculations by The Economist show that house prices have hit record levels in relation to rents in … Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.”

    “In other words, it looks like the biggest bubble in history.”
    It goes onto say house prices where comparisons are available (Oz, UK, Spain show property are overpriced by 50%. No figures for Ireland were available…. The warning was clear and implicit), and that the low inflation rates meant a price crash was coming.

    Davys, hardly heralds of doom, said at the same time, rents in parts of Dublin were heading towards 100 times rent earned (!!!) and the last paragraph of their March 2006 newsletter gave out clear warnings on the bad value and risks out there.
    http://www.davydirect.ie/other/pubar...cr20060329.pdf

    June 29th 2006 – Irish Government loses its way
    Premium content | Economist.com

    Oct 10th 2007 – Ireland’s economic boom may be ending
    Premium content | Economist.com

    With a cooling of the market already underway, Ireland may be about to experience a period of sharply falling property prices….For many investors, the logic of holding property is now based entirely on the assumption of future capital gain. If this assumption changes, there is likely to be a rush to offload properties. This is the most likely trigger for a correction in the Irish property market and an almost certain, sharper than forecast slowdown in the wider economy.”

    “Moreover, a shakeout in the construction sector—a major employer—could drive up unemployment, with secondary affects on consumer spending. Unemployment could also worsen as a result of a major economic slowdown in the US, which takes over 18% of Ireland's exports—the highest proportion in the EU. A retrenchment by US multinationals would also have a disproportionate impact on Irish employment.

    Finally, falling house prices or just a lower volume of sales in the event of market freeze, will substantially reduce stamp duty revenues to the treasury, something that has become an increasingly profitable source as prices have risen and tax bands have remained unchanged. A soft landing still looks to be the most likely outcome, but a confluence of economic problems could create major downside risks.”
    The point being, while the Economist suggested a soft landing was on balance more likely, Ireland was very badly exposed to a collapse in revenues and any big international shock. This is exactly what happen.

    The Oct 2004 covers the wider issues, but the June 2005 article explicitly dealt with the housing boom. It pointed out there was a big property bubble in Ireland. ESRI (ESRI - The Economic and Social Research Institute in Ireland ) belatedly followed suit in 2006, saying, in the same article Cowen lists as saying a ‘soft landing is still the more likely outcome’.

    On house prices, we draw attention to the OECD finding for mid-2005 of a 15 per cent overvaluation. Given the acceleration in prices since then and the increase in interest rates, we believe that the possibility of there being a bubble has now increased. We add our voice to those expressing concern about the possibility of a bubble bursting. However, this does not imply that a sharp fall will occur. A soft landing is still the more likely outcome
    Hardly an assuredly confident statement...

    As mentioned above, the OECD said in Nov 2005 that house prices were over valued by at least 15%. (http://www.irishtimes.com/newspaper/...9HM1EMMET.html). The Central Bank and IFSA supported this position. I guess ESRI had to come out and say something… The Irish Times who broke the story, revealed minutes of an OECD meeting where they indicated that property was overvalued but was fearful of precipitating a crash by "putting a number on it". Ie; Those that knew, knew – they just weren’t making public statements on it.

    RTE Futureshock went out in April 2007 (RTÉ Television - Futureshock) . Dismissed by the property pundits, the Taoiseach and Cowen as “sensationalist”, it spelt out exactly what ended up happening

    In a special programme, RTÉ Television examines whether Ireland's property bubble is about to burst. In Future Shock: Property Crash, journalist Richard Curran assesses the chances of a significant readjustment to Irish property prices, and asks who will feel the most pain if the market does crash?
    As the first cracks start to appear in the Irish property market, are we headed for a 'soft landing' or are we facing into the beginning of a more significant slide in values. In short, are we facing a crash?
    Examining the underlying realities of current trends, presenter Richard Curran asks if a predicted growth of 3% nationally for 2007 masks a more worrying situation? Looking into the future, he asks could a property crash happen in Ireland and, if it did, who would be most affected?
    Exploring the external and internal factors that could cause a significant drop in values in Ireland, Futureshock: Property Crash looks at the sliding dollar (particular $/€ at €1.50 – which it was for ages) and a downsizing construction industry, as well as at increasingly negative sentiments in the market place.
    Painting a compelling picture of where the Irish property market is at, Richard Curran questions the role of banks and other institutions in predicting a potential collapse. Have our institutions behaved responsibly towards exposed groups such as first time buyers, for example?
    In order to answer these questions, Curran brings us through some of the other property crashes that Irish emigrants have been caught up in, including the big crash in Britain in the 1980s.”
    The reaction was, well, funny. Please read this article (Future Shock - Property Crash - the reaction - Property, Unsorted - Independent.ie) in its aftermath from the Indo. Interesting to see Alan Aherne’s position identified… Clíodhna O'Donoghue must be mortified now.

    The programme wasn’t even that heavy hitting.
    “Couples in the commuter belt living in €450,000 homes are also at high risk with warnings that their houses could drop to €315,000 in value within years.”
    Bertie Ahern said it (http://www.magico.ie/files/admin/upl...ld_2_23412.pdf) was ‘inaccurate’, ‘irresponsible’ and ‘disagreed with almost everything in it’. Another great judgment by our fine leader.

    In late 2006 Morgan Kelly, professor of economics at University College Dublin, writing possibly the best and most criticised article on the issue, said in the Irish Times (The Irish Times - Thu, Dec 28, 2006 - How the housing corner stones of our economy could go into a rapid freefall) stated:
    "Compared with income, rents have actually fallen since 2000. The fact that rents have fallen shows conclusively that our housing boom is a bubble, pure and simple."

    But why can't we just have our soft landing, where prices stay fixed or rise slowly for a while?
    Definitely not: a soft landing is not so much unlikely as contradictory. Suppose that house prices really were expected to level off, then the owners of the tens of thousands of empty houses and apartments can expect no further capital gains and should cash in their investments.
    Why pay a mortgage on an empty apartment that has stopped rising in value? As speculators rush for the exit, prices will crash.
    It is not implausible that prices could fall - relative to income - by 40-50 per cent.

    Between building new houses and selling existing ones, housing generates almost one-fifth of our national income. In effect, the economy is based on building houses for all the people that have got jobs building houses. Economists call this a multiplier-accelerator process and it is very unstable.

    “Pilots define a soft landing as one that you can walk away from. Looking at the collapses in Finland and The Netherlands and the building bust in Arizona, Ireland could be heading for what they call CDIT: controlled descent into terrain. You are happily descending through cloud, thinking yourself at a safe altitude, until suddenly you smack into a hillside.”
    Even the opposition were calling it, in the Dec 2006 budget debate. Richard Bruton said:

    The Government is increasing spending at a rate 50% faster than the growth of national income. Taxes are rising as a result. This year, the Government is continuing the trend by budgeting to increase spending by 11.5%. To put this in perspective, an ordinary worker will be lucky to obtain an increase of 4%. The surplus has been cut back at a time when the economy is experiencing pressure on the prices front and when SSIAs are coming on stream. Spending is increasing far faster than national income and tax revenues and this is posing a threat…
    The Government has doubled its dependence on the construction sector to support its revenue. A total of 25% of every tax euro spent by the Government comes from the construction sector. We are not in a strong position; we are, in fact, in a vulnerable position.
    The real question is whether the Government has done enough to build the capability of the economy to withstand the real pressures under which it is about to come. Those pressures do not merely revolve around the possible slowdown in the housing market; they relate to the relentless march of competition that is coming our way. Our competitiveness has declined in each of the past five years. In the same period, our share of export markets and the level of manufacturing employment have fallen. Some 50% of the jobs that existed in IDA Ireland and Enterprise Ireland industries five years ago have disappeared.
    So Cowen, for his 7,000 words last night, had plenty of people warning him of the risks. It’s a simple fact he choose to ignore that advice and carry on listening to those that suited his line of thought. Those that stood up and warned where this was going, like Lee, McWilliams, Curran and Kelly, were jumped on by FF, developers, banks and pressure groups, and told to shut up, or in Aherns words

    Sitting on the sidelines, cribbing and moaning is a lost opportunity. I don't know how people who engage in that don't commit suicide because frankly the only thing that motivates me is being able to actively change something
    Brian Cowen took off the brakes McCreevy had applied, in line with his masters wishes. Spending started accelerating once more, this time based on a foundation of sand and concrete and not on competitive analysis. Cowen continued a light touch of the regulatory scene, and never asked the hard questions or took the tough decisions. Cowen duty was not simply to act in accordance with good news, but to also prepare for the worst, if it happened. He didnt. He gambled all would go according to the one set of plans. NThere was no plan B. Its the equivalent of sending your kid to school in shorts and a t-shirt and guessing the weather will remain fine.

    The performance of Cowen doesn’t need a 7,000 word defence, he has a simple mantra. ‘Hear no evil, see no evil, no evil existed’.

    Listening only to sycophants or people with a vested interest in keeping a confidence trick going is no way to run a country. One thing he did say last night though was true… he’s seen some changes at the top of the regulators, he’s seen some changes at the top of the banks and he’s seen some changes in government in other countries who presided over this collapse… only one thing missing… a change in the government here.
    Last edited by adamirer; 15th May 2010 at 10:17 PM.

  2. #2
    Politics.ie Member nonpartyboy's Avatar
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    All pointed out on askaboutmoney(until discussion was banned,by a supposed champion of consumer rights !!???) and other sites going back as far as 2003/4 and then on to the propertypin, but nobody in positions of power was listening.

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    Politics.ie Member adamirer's Avatar
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    All feeding into how he's performed since... http://www.politics.ie/economy/12643...decisions.html

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    Politics.ie Member Mitsui2's Avatar
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    The OP should be published in the IT as a useful corrective to the long piece of Bart Simpsonish windbaggery delivered by our beloved Taoiseach.

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    Politics.ie Member TradCat's Avatar
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    Quote Originally Posted by Mitsui2 View Post
    The OP should be published in the IT as a useful corrective to the long piece of Bart Simpsonish windbaggery delivered by our beloved Taoiseach.
    +1

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    Politics.ie Member Disillusioned democrat's Avatar
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    This thread should become compulsory reading for all students of Irish history. This is the best assessment and summary of Cowen's performance I have ever read - thanks.

    I makes a mockery of RTEs fawning coverage of a "reinvorated Brian Cowen" with a "spring in his step", and his 7000 word "it was everyone's fault but mine" speech.

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    Politics.ie Member adamirer's Avatar
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    My main beef is that he didnt put anything in place if he was wrong. He was totally unprepared and had no fall back position. Any credible organisation weighs up what it expects/hopes will happen and what might happen. He showed awful judgment.

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    Politics.ie Member libertarian-right's Avatar
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    +1

    Brilliant roundup of the bubble years. Email it to the newspapers

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    well done you have managed to make absolute sense of the whole sorry saga. great post

  10. #10
    Politics.ie Member Mitsui2's Avatar
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    Quote Originally Posted by adamirer View Post
    All feeding into how he's performed since... http://www.politics.ie/economy/12643...decisions.html
    Don't know how on earth I missed that thread!

    Its OP is equally clear, well-sourced, forensic... and damning.

    adamirer, if you're doing many such summaries, you really should think of collecting and even publishing them. It would be good to have a single, overarching source that serves so comprehensively to rebut the tide of spin and waffle that often threatens (and usually manages) to drown meaningful debate on the behaviour of this government.

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