We’re on the road to ruin and the Japanese model is the one to fear

SOMETIMES something seems so patently obvious that one begins to question one’s own judgment when so many others don’t seem to see it.

Of course, Bertie is better than Bush or Berlusconi but, as I have been suggesting here since December 1999, his Government is "probably the worst Government we have had since the GUBU administration of 1982, which was the worst government in the history of the state."

It has squandered some of the greatest advantages enjoyed by any Irish Government. Reports of factory closures are now becoming a regular occurrence. In the past week there was news that Navan Carpets were closing down after 65 years with the loss of 200 jobs, and an American factory is closing with the loss of 118 jobs in Kilbeggan, Co Westmeath, a town of less than 800 people. That is a devastating blow to a small community, the equivalent of more than 24,470 jobs in Cork city.

Gweedore, Co Donegal, is suffering a similar setback after a yarn-manufacturing plant operating there for 31 years went into receivership with the loss of 200 jobs. All of them suffered because we have become uncompetitive on the international market. But this is not just an international thing. Neville Brothers announced the closure of their modern bakery, with the loss of 50 jobs in Macroom. They had been supplying Dunnes Stores in the Irish market. Ireland is rapidly becoming uncompetitive for manufacturing industries.

Some people will say that this is part of modernisation in that we are moving from textile-based industries that formed the initial basis of industrialisation in most countries. But we are deluding ourselves if we think we can survive on hi-tech industries alone. The Exchequer returns for the first half of this year show a deficit of €344m, which is down from a surplus of €504m last year, and it is €340m below the target at the start of the year. Income tax returns are already down by 7%. The traditional remedy has been to raise taxes or cut spending, but each of those tends to lead to a vicious circle that only makes things worse. Our Government has essentially ignored the problems which have been eating away at our competitiveness. We are wasting millions on inefficient government structures and investigations that have been uncovering corruption, but nobody is being held responsible. Charlie Haughey will never stand trial here. The Flood Tribunal concluded that Ray Burke received his house as "a corrupt payment" and that he had also corruptly received over £195,000. In addition, Mr Justice Flood cited him for obstructing and hindering the tribunal on 14 specific counts, by providing false testimony and colluding with others in giving false testimony. Yet, now there are suggestions that we should pay €10m for his legal costs. This is sheer lunacy. It is almost five years since Tom Gilmartin made his accusations against Pádraig Flynn but he has not even been called to testify yet. All of these things, which amount to the democratic betrayal of the people of this country, have been left to fester and become little more than distractions. The speculator elements that generated the corruption are now threatening our whole economy.

House prices are still rising and it is projected that the average price of a house will be over €250,000 by the end of the year. This contains the seeds of economic destruction. The Government has finally announced plans to tackle the insurance scams, and the Taoiseach outlined his plans yesterday to provide cheaper housing in Dublin and the surrounding hinterland. This should be welcomed but the Government needs to demonstrate that it is determined to act now. But having made these announcements, the politicians have gone on holidays. The boom in house prices is being fuelled by homebuyers borrowing up to €1 billion a month.

In the past an interest rate hike would dampen that kind of speculation, but we no longer have control of our money and our economy is really of little significance in the broad European context. If we went burst in the morning, they would hardly notice on the European mainland.The average price of a house in Dublin is already €300,000 and it is projected that it will be over €200,000 in all of our cities by the end of the year. Some house-owners may be delighted, but this is only of value to them if they have another place to live. The only people who are gaining right now are the property speculators who have bought up places and forced the prices up.

PRICES climbing faster than earnings, which is the recipe for a bubble. Normally price rises slow demand, but in a bubble they generate buyer enthusiasm and lead to increased demand, thereby forcing prices to rise even higher until the inevitable reverse occurs. We should all be aware that we have a bubble in our house prices that is reaching dot.com proportions. This is a recipe for economic ruin, because the bigger the bubble, the bigger the trouble when the bubble bursts. To pay back the exorbitant mortgages, people will have to earn more, which means that prices will inevitably go up and our competitiveness will further deteriorate. We will have more job losses, more people drawing unemployment assistance and fewer people playing taxes. Government will then be compelled either to cut services or raise taxes, or both, and these will likely compound the problems.

We are already on the slippery slope. Britain suffered a classic bubble in the late 1980s. House prices soared by 35% in one year and then crashed, leaving many people with negative equity owing more on their houses than they were worth once prices fell. During the 1980s Japanese corporations suffered from a decline in profitability, so they gambled on shares and property prices.

By 1990 the Japanese property market was worth four times the value of all US property. The grounds of the imperial palace in Tokyo were worth more than all the property in Canada. To purchase a house, people had to take out multi-generational mortgages. In 1986 Japanese interest rates were cut four times until they reached 3%. In the 30 years since 1960 property prices increased by a multiple of 50. Credit and debt rocketed. Billions were lent to people to buy property, so prices spiralled. Most of the property was held only for its capital appreciation, not its productivity. The richest 20% saw their wealth quadruple during the boom, but then on Christmas Day 1989 the Finance Minister announced a rise in interest rates.

Within four days the stock market began to fall. By March it had lost a quarter of its value. By September 1992 stocks were down by 65%. House prices held up at first but by 1992 they had fallen by 60%. In the next eight years they dropped another 20%. A great many corporations went bankrupt and pension funds evaporated, because they had invested their money in overrated property. Is anyone so foolish as to think it couldn't happen here?