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Gaelic Sense on Cents

Posted by Larry Doyle on June 14, 2010 11:45 AM |

While the United States has very clearly chosen the Japanese path of ‘kicking the can down the road’ to deal with our current economic crisis, the Republic of Ireland has chosen the Swedish approach of ‘take your medicine as quickly as possible.’ Economists and analysts will debate the merits and shortcomings of each style for a long time. That said, is there anything we can learn currently from our friends in Ireland?

The Financial Times addresses this question this morning in writing, Ireland’s Financial Lessons:

A profligate government in thrall to out-of-control property developers lavishes incentives on the construction industry to keep tax revenues flowing. Clueless banks raid wholesale markets for funds, and drop lending standards as the cash is pushed towards those favoured developers. Deferential regulators merely look on. That, in a nutshell, is how the seeds of Ireland’s financial crisis – the most severe of any country outside Iceland – were sown between 2003 and 2008.

Now two reports into the fiasco flesh out the narrative. Their joint and separate conclusions are that this vicious circle meant the crisis was almost entirely home-made. Much of the Irish banking sector – and especially the two chief victims of the crisis, Anglo Irish Bank and building society Irish Nationwide – was heading straight towards insolvency even before the collapse of Lehman Brothers.

The reports – by Patrick Honohan, governor of the Irish central bank, and by banking experts Klaus Regling and Max Watson – make uncomfortable reading for everyone involved. Unvarnished accounts of such crises usually do. They may not necessarily tell us anything we don’t know already about how the Celtic Tiger came to collapse so destructively and spectacularly, but they offer sober analysis and help to prepare the ground for a full and honest reckoning.

As with the nation’s reluctant but comprehensive embrace of austerity measures to right its economy, there are also important global lessons from these accounts. One is that countries experience financial crises in different ways, requiring tailored solutions to the problems. Another is the calamity of regulatory deference. Ireland’s regulator had no more than two staff involved in prudential supervision of each large credit institution it supervised, and, perhaps as a result, emphasised process over outcomes. A third is the need for a full accounting of the financial crisis. Perhaps Ireland’s example will prompt other countries to offer an equally robust account of their own banking failures. It is the least taxpayers deserve.

Have American taxpayers received the same transparency and integrity in our attempts to reconcile what precipitated our economic crisis? Not even close. All too often, we hear bankers, regulators, and legislators reference the ‘thousand year storm’ as a convenient excuse to cover the incompetence and corruption embedded within the Wall Street-Washington incest.

In regard to our regulators, we have never had a full accounting of the real incompetence and corruption embedded within our financial regulators. The self-reviews undertaken by the SEC and FINRA will never generate truly robust results.

Maybe it is the cultural guilt buried deep within the Irish mentality which drove the Irish to an honest and full accounting of their crisis. Whatever the reason, the Irish transparency and integrity is the absolute least the American taxpayers deserve. Will we ever receive it? If the future is anything like the past or present, do not hold your breath!!


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