Reports show Cowen’s culpability in banking crisis
Mr Cowen devoted a significant chunk of that speech to defending his own record as finance minister prior to becoming Taoiseach.
The opposition thought it was simply a preemptive attempt at damage limitation ahead of the publication of the preliminary banking inquiry reports. But as the reports themselves made very clear yesterday, no amount of pre-emptive damage limitation would have worked – because they are simply devastating for Mr Cowen and the Government.
They are also devastating for the banks themselves, the Central Bank and the Financial Regulator. But most of the people at the top of the banks, the Central Bank and the Regulator’s office have stepped down or been swept aside – leaving the spotlight uncomfortably resting on Mr Cowen.
Up to that speech last month, the Taoiseach had done his best to assert that the financial and banking crises were primarily caused by the global credit crunch and downturn linked to the collapse of US bank giant Lehman Brothers. Both of yesterday’s reports blow that claim out of the water.
The first report, carried out by international banking experts Klaus Regling and Max Watson, states: “Ireland’s banking crisis bears the clear imprint of global influences, yet it was in crucial ways ‘home made’.”
The second report, carried out by Central Bank governor Patrick Honohan (who was appointed only last year and had no involvement in the boom- to-bust nightmare) is even blunter.
“The weaknesses of the Irish banks were not caused by the interruption in the flow of cheap money from abroad... Nor was the failure of Lehman Brothers decisive... Apart from the role of the Central Bank and Financial Services Authority of Ireland (CBFSAI), banking practice and Government policy both clearly played a central role in contributing to the crisis.”
In order of culpability, Regling and Watson focus on Government failings first, followed by senior bank management and the regulators.
“Fiscal policy, bank governance and financial supervision left the economy vulnerable to a deep crisis, with costly and extended social fallout,” the authors state.
Fiscal policy – ie, Government policy – should have “done more to dampen the powerful monetary and liquidity impulses that were stimulating the economy”, they say.
Instead of a pro-cyclical policy – pumping money into an already booming economy and thereby adding “fuel to the fire” – the Government should have opted for counter-cyclical policies. Such actions would have created “fiscal space to cushion the recession” when it came. But these actions were not taken.
“Budgetary policy veered more toward spending money while revenues came in. In addition, the pattern of tax cuts left revenues increasingly fragile, since they were dependent on taxes driven by the property sector and by high consumer spending,” Regling and Watson state.
Their findings represent a damning indictment of successive Fianna Fáil governments during the boom and Mr Cowen himself, who was finance minister from September 2004 to 2008.
In his report, Mr Honohan blames the banks in the first instance, saying there is prima facie evidence of “a comprehensive failure of bank management and direction to maintain safe and sound banking practices”.
But he then proceeds to the Government, and is no less damning than Regling and Watson, effectively saying it led the public to believe the Celtic Tiger “party could last forever”.
“Macroeconomic and budgetary policies contributed significantly to the economic overheating, relying to a clearly unsustainable extent on the construction sector and other transient sources for Government revenue (and encouraging the property boom via various incentives geared at the construction sector),” Mr Honohan writes.
“This helped create a climate of public opinion which was led to believe that the party could last forever.”
Finally, Mr Honohan blames the CBFSAI (Central Bank and Financial Services Authority of Ireland), saying the regulatory approach during the boom was “excessively deferential and accommodating”, “insufficiently challenging and not persistent enough”.
Both reports point out that, although some of the most respected economic authorities failed to spot the amount of trouble brewing, the Government did receive some warnings about their policies during the boom.
Each report also contains its own unique findings. For example, Mr Cowen has said in his defence that he abolished in Budget 2006 a series of tax incentives which fuelled the property bubble. Yet Regling and Watson find that, even after their abolition, “the system remained distorted” – ie Mr Cowen did not go far enough.
Mr Honohan’s report, meanwhile, says the problems in Anglo and Irish Nationwide were so bad that they were “well on the road towards insolvency” even if the international financial markets had remained calm in September 2008.
Mr Honohan also queries why it was that, despite this, senior Anglo figures were allowed continue in office “for some months” after September 2008. He says the fact that these figures “were well-liked in political circles... cannot be excluded” as a reason for this.
Is there any good news for the Government in the reports?
It must be said that Mr Honohan does largely absolve the Government on both the bank guarantee scheme and the Anglo bailout, saying both were necessary, even if he questions the manner in which both decisions were arrived at.
He questions, for example, the breadth of the guarantee, and why it included subordinated debt, but agrees that urgent and significant action was required to rescue the banks. He also finds that Anglo, contrary to opposition claims, was a bank of systemic importance, and therefore could not be allowed go under.
The Government has been quick to seize on these findings, and present them as evidence that its actions to rescue the banks were the correct ones.
But can that in any way absolve the fact that, as these two reports definitively conclude, the Government helped cause the crisis in the first place?
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