‘Dr Doom’ needs to back up his views with hard evidence
Soon dubbed Dr Doom, Mr Roubini’s predictions were all too prescient. The global economy spiralled into a vicious downward loop that took unprecedented government and central bank action to stabilise.
In the process, Mr Roubini became an unlikely household name who bloated his bank account through syndicated articles and speaking engagements advising how bad things were going to get.
The era of the celebrity economist was here.
Morgan Kelly was Ireland’s Dr Doom. To jaw-dropping disbelief, he told RTE’s PrimeTime that the country’s banking system was on the verge of collapse and that the ensuing strain on the public finances would trigger an official bailout.
Mr Kelly’s views prompted a huge backlash from the Government. Subsequent events were very much on Mr Kelly’s side.
However, rather than cash in on his new found fame, the UCD economics professor went to ground. Over the past few years he has penned a handful of columns for a few newspapers, but public appearances have been very fleeting.
Over the weekend, Mr Kelly grabbed headline news when he said that the level of SME debt in the banking system had the potential to put the economy back in crisis mode.
These massive debts would crystalise into losses during the ECB stress tests later this year, which would presage a wave of business failures.
SME debt is a huge issue, but this has been well flagged on many occasions. The quantum of debt in the system of roughly €58bn is known. The banks were recapitalised following very rigorous stress tests in March 2011. The economy is performing better than the worse-case economic scenario outlined in these stress tests. All three domestic banks passed the Central Bank’s Balance Sheet Assessment before Christmas.
There is also the question of motive. The ECB was part of the troika together with the European Commission and the IMF that oversaw the restructuring of the economy during the bailout period from December 2010 to December 2013. There was a lot of progress made over that period. Why would the ECB want to undermine that recovery?
It is hard to know exactly what point Mr Kelly is making as his argument was made during a one-hour lecture in UCD and posted on YouTube. There is no accompanying research paper outlining evidence to back up his comments.
Mr Kelly really needs to put together a detailed explanation of his views. Has he forensically combed through the banks’ SME loan portfolios to check coverage ratios and the numbers of loans that have been restructured among other important metrics?
If Mr Kelly wants to engage in a policy debate then he has to be able to support his argument. He has made erroneous claims in the past. He wrote an article for the Guardian newspaper in 2009 that the Irish banks had billions of bad derivatives deals sitting off balance sheet. There was no follow-up or engagement with the media about these claims, which have so far proved to be unfounded.
This is just one of a number of his predictions over the past few years that have not come to pass, yet at the time generated a huge amount of publicity.
There are a number of examples of economists such as UCD’s Karl Whelan, Trinity’s Philip Lane and UL’s Stephen Kinsella among others who richly contribute to policy debates on the current state and future direction of the economy. All three produce lengthy and detailed research papers to support their views. This has to be a minimum requirement in the future, particularly when the stakes are so high.
David McWilliams has also traded on being the first economist to call the downturn.
However, his contribution to the subsequent economic policy debate has been somewhat patchy.
He advocated that Ireland follow the Argentina route and default on its debts. Indeed, the decision to guarantee the banks in September 2008 was known in government circles as the ‘McWilliam’s option’.
Just like in every part of Irish life, the policy debate has to become more transparent and accountable. If economists want to make controversial remarks they have to provide a reason why.
