The publishers are no doubt delighted with the war of words between David McWilliams and Minister Brian Lenihan. It rose from the somewhat charming picture painted in the book of an exhausted Minister for Finance battling to rise above the puny ideas of his bewildered mandarins. Armed only with a clove of raw garlic and a copy of Alan Greenspan’s biography, the Minister is portrayed as all at sea when he arrived on the McWilliams doorstep in September 2008. The idea of the blanket bank guarantee which McWilliams had been hatching in a series of articles was there brought to life. The Minister now disputes the parentage of the idea and dismisses the notion that he ever expressed doubts about the quality of advice he was receiving. To bolster his case the Minister portrays McWilliams as an unreliable commentator who would sink the banks and leave the euro. This sounds like playing the man and not the ball – or as the Minister’s profession might put it, an “ad hominem” argument. You’d have to give Round One to McWilliams in the recollection stakes.
However, McWilliams makes a more fundamental charge against Lenihan. He believes that the opportunity provided by the original bank guarantee decision was then handled ineptly. Lenihan was suckered into NAMA under pressure from powerful banking interests and because of a fundamental misunderstanding of how investors in the marketplace think. McWilliams’s vision was that the guarantee would give breathing space not to get the taxpayer to buy bad loans in order to save all the banks and their bond holders, but instead to force the banks to confront their problems, to take their losses, and then Ireland would emerge with a smaller but fundable banking system. I don’t want to add further to his prickly relationship with the Minister but I have to say that the bank resolution he envisaged is almost identical to the Fine Gael approach.
In the McWilliams portrayal, the idea of the guarantee was subverted by an unholy alliance of interests conspiring to panic the government into saving professional risk investors in the banks, in the naïve belief that investors would never look at Ireland again if such investors suffered the consequence of their bad decisions. He describes it as a policy “no bond holder left behind”. It has the added drawback that it will quarantine the property market for years, waiting in hope for another property surge to rescue the taxpayer’s investment.
It seems that raw garlic, which is legendary in its ability to deflect the Transylvanian Count, was not sufficient to fend off the vampire banks from a Minister who refused to contemplate driving a wooden stake through the heart of some banking interests.
CREDIT JUNKIES
The drug trade is the metaphor that McWilliams uses for illustrating the way the financial system lured Irish people to our collective downfall. We all became credit junkies in a collective mania. It started when the traditional “dons” of the banking world were confronted by a new Godfather in the trade who had smarter distribution channels, new sources opened up by the euro, and hungrier dealers who were getting a slice of the action. This was the explosion of Anglo Irish onto the banking world. This new Godfather initially wiped the eye of the stuffy old-timers. However, soon the old dons too changed tack, and started chasing the business with ever more reckless hooks to pull users on board.
In the face of this new explosion of credit on the street hooking in the most gullible, the regulators are cast in the McWilliams story as “the bent cops”. They weren’t interested in enforcing rules, but had become “the Bord Fáilte of the banking world”. In the IFSC, they had set up “the red-light district of international finance” where the wildest financial practices and fetishes could be freely practised.
The explosion of credit in 21st-century Ireland is likened to the explosion of the potato in the 19th century. In the short term, it opened up huge possibilities only to lure people into a precarious path that led to crushing disaster.
It is the “Pope’s Children” of McWilliams’s earlier books who are the main victims caught up in the web of credit. The characters brought to their knees are vividly painted: “Miss Pencil Skirt”, the smart PR lady; the “Merchant of Ennis”, an unfortunate GAA star turned property developer; and “Fin Boy” who got all his pals to sign up for balloon finance hire purchase. One by one they were sucked down.
These pen pictures of people we all know, and can relate to, help McWilliams show the flesh and blood consequences of the appalling mismanagement of our banking sector in a way that the standard economic commentators with their graphs and their spreadsheets could not possibly have done. This is the real human cost of this disaster that has to inform the solutions we pursue.
CHALLENGE TO ORTHODOX
McWilliams is scathing in his criticism of the official economic orthodoxy in its response to this crisis. NAMA just serves to allow the banks survive without suffering the ramifications of their own stupidity and greed. He sees the attempt to cut spending, and crush down prices and wages as a policy that will just push up unemployment and increase the real burden of debt on families and business. It is a strategy where the interests of the “insiders” have got the upper hand over those who are on the outside. He portrays the backing of the ECB for the banking strategy as a “Viet-NAMA” venture, prompted by the ECB’s determination to prevent a “domino effect” among members of the euro that would come from a banking collapse in one Member State. The narrative is fast and emotional, and is carried along by these sympathetic characters for whom the reader inevitably feels sympathy. This relieves the author from the need to examine the credibility of alternative interpretations of these events.
The radical alternative now needed, according to McWilliams, is for Ireland to leave the Eurozone entirely and re-establish the Irish £ at much lower value. At a stroke this cuts our costs, marks down the burden of our debts and stops people postponing their spending in the expectation of further price cuts. NAMA would be abandoned and further falls in property prices would be encouraged by restricting loans that could be issued on a house to the collateral set by the average of house prices over the last 30 years.
As anyone who reads or watches David McWilliams will expect, this is a vivid, witty and provocative book. It is a compelling story. It will help people see the nature of our challenges in a new light and provoke new thinking about them. Like many promising stories, the ending doesn’t quite live up to the rich plot that preceded it. With one bound, our hero is free by the simple move of abandoning the euro currency. He quotes examples of successful devaluations but all in cases where countries already had an independent currency and it was just a case of moving the peg. The only difficulty he foresees is negotiating a new source of financing probably with the IMF rather than the ECB. Once liquidity was in place, he claims we could proceed calmly.
However, many vital questions are left totally unanswered. This would be a default not just on professional investors who deserve the consequence of bad risk-taking, but on those who have fully legitimate expectations that the State will honour its commitments. The establishment of the new, soft Irish £ while everyone still has hard euros in their pockets is not explained. The inevitable surge in the cost of borrowing for a State which is funding 30% of its day-to-day spending on tick is not addressed.
It is not surprising that Brian Lenihan used the euro plan to debunk the author. McWilliams has exposed himself to this somewhat easy put-down in an otherwise enlightening story. However, his devoted readers will enjoy the ride even if the final destination is somewhat fuzzy.
