THE decision by Prof Patrick Honohan to retire as governor of the Central Bank later this year is sensible.
He has done a near-impossible job presiding over the greatest monetary debacle in the history of the State. His appointment in 2009 was singular — it broke a long tradition whereby the post was filled from the senior echelons of the Department of Finance.
Then, again, so were the times: The stabilisation of a broken-backed banking and financial system needed someone with a different perspective. It is characteristic of the man to decide the time and manner of his going.
Still, his decision marks the end of an era, not alone in Ireland but as part of a process across the global financial system. Prof Honohan belongs to a small group of distinguished monetary economists from an academic background who, when the collapse came, found themselves with the responsibility of navigating the rapids generated by the global financial collapse. They included Ben Bernanke, chairman of the Fed, and also Mervin King, governor of the Bank of England, each of whom were outstanding researchers. Prof Honohan belongs in that company.
The Central Bank was established, in an attenuated form, in 1942. The next 30-odd years were a time of incremental development, as more responsibilities were devolved to the bank.
Then a new era began. Patrick was to become an important part of it. In 1969, Dr TK Whitaker was appointed governor. His tenure was transformational.
This reflected the quality of the man, and the times. He had pushed retail towards rationalization while secretary of the Department of Finance. The Central Bank Act 1972 greatly increased the responsibilities of the bank for the licencing and supervision of banks.
This was also the time of Ireland’s accession to the EEC. Whitaker became a member of the committee of Central Bank governors. The axis of the bank’s policy switched from London and sterling towards Europe. This entailed a new focus on research in the field of monetary and exchange rate policy. This was the seedbed of the work that was to underpin Ireland’s decision to join the exchange rate mechanism, the subsequent break in the link with sterling and, in time, into the single currency. He held the Government to account in the matter of credit policy, borrowing and debt.
Dr Whitaker retired in 1976 but he left an enormous footprint — not alone in central banking but also in the inextricable connection between banking and the common good. He influenced all of us who worked there during his time, including Patrick who began the first stint of his two stints as an economist with the bank that same year that Dr Whitaker retired. Patrick was part of that new dynamic, particularly in research.
This is the essential point of reference for an understanding of the terrible failure to build on of what Whitaker, in particular, had inculcated into the DNA of the Central Bank in its engagement with banks.
The biggest failure of all was this: The political and institutional governance of banking became detached from the corresponding values embedded in the Constitution, including the common good.
Article 45 of the Constitution is very specific. It sets out “the principles of social policy” to be followed by the State and its institutions: “The State shall strive to promote the welfare of the whole people by securing and protecting as effectively as it may a social order in which justice and charity shall inform all the institutions of the national life.”
It pledges the State “to safeguard with especial care the economic interests of the weaker sections of the community”.
In addition, it requires of the Oireachtas that “in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole”.
The Central Bank Act 1942 incorporated the letter, and the spirit, of these values. It mandated the Central Bank, and the Oireachtas: “The bank shall have the general function and duty of taking… such steps as the board may from time to time deem appropriate and advisable towards safeguarding the integrity of the currency and ensuring that, in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole.”
Much ink has been spilt on regulatory failure in Ireland as a contributory factor to the banking crisis inherited by Patrick. But the reality is that, had the banks adhered to the constitutional principle that credit policy should be guided by “the welfare of the people as a whole” — then there would have been no seismic regulatory failure in Ireland.
That social imperative — the whole idea that, “in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole” — fractured, and broke, under the pressure of a credit-boom enabled by both government and major banks in Ireland and internationally. It was this that brought Patrick back to Dame St, as governor.
A very different set of values from those embedded in the Constitution colonised the Irish banking system from the 1980’s. This ideology was imported from the US. It focussed, not on “the welfare of the people as a whole” but rather on the short-term profitability of investors. The common good, as an integral part of a competitive banking system, was “captured” by this ideology — a fusion of short-term shareholder value and poor governance, leading inexorably to collapse. This was reinforced by the loss of national autonomy. At a minimum, Anglo should have been allowed to fail in the absence of the ECB underwriting these losses.
Clearly, this ideology — based on a financial model that ruled, rather than served, the country — needed to be discarded, especially given the costs of the collapse to this, and to the next, generation.
That battle has been lost, at least for now. It’s not clear that, given the political forces against Prof Honohan — who well understands public service — it could have been won.
The old model has been rebuilt albeit with more regulation. Enormous profits have been made by international speculators from the deleveraging, restructuring, and recapitalisation of the system.
Despite all of the current political noise, the bank’s influence is now very much secondary to that of the banks. The mortgage market is scarred by a form of apartheid. Mortgage arrears arising from the misconduct of the banks are a cross laid on the back of the people, whose welfare both the Central Bank and the Government are required by the Constitution to uphold. In this environment Central Bank codes of conduct carry little clout.
Instead, the criteria for “recovery” have been the return of unreconstructed banks to profitability.
Article 45 of the Constitution pledged the State “to safeguard with especial care the economic interests of the weaker sections of the community”. With the imposition of austerity, the weaker sections were the first to the wall.
Patrick had little influence over the Coalition’s adoption of austerity and what was, and is, a deeply flawed and regressive model of adjustment. It could have been challenged more vigorously in the councils of the eurozone.
Patrick brought a most formidable intellect, as well as an irreverent sense of humour, to the job governor. He also brought credibility to fora where Ireland’s debt burden is bartered. He will be missed by the staff of the bank — as Whitaker was. Patrick told it like it was to a political system in denial — his call to RTÉ Radio One’s Morning Ireland to say the troika were in the hall and wanted the keys to the house and the car was the stuff of legend.
The decisions which subverted those constitutional values which had previously underpinned banking were not made by economists. It was the politicians and the ideologists and powerful interests. Some things never seem to change.