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We made a 'bad mistake' not predicting the banking crisis - but so did everyone else

This ESRI professor says regulators could still have stopped the financial catastrophe.

ESRI professor John FitzGerald
ESRI professor John FitzGerald

Updated 12.32pm

RESEARCHERS FROM IRELAND’S top economic think-tank made a “bad mistake” when they failed to predict the banking crisis, one of its chief academics has said.

But the Economic and Social Research Institute (ESRI) did make repeated warnings to the Central Bank and other officials about the risk of the growing property bubble – and their cautioning was ignored.

ESRI professor John FitzGerald said between 2001 and 2007 the organisation called for policies to be introduced to “defuse the situation” of rapidly-rising house prices and reckless bank lending.

If the advice on fiscal policy had been followed, Ireland would probably have escaped much of the damage that was suffered over the recent crisis,” he said.

FitzGerald was appearing this morning before the Oireachtas banking inquiry, where he said he was speaking only for himself – not the ESRI.

He admitted the influential think-tank’s 2008 review had failed to recognise the “impending financial collapse” in the banking sector which plunged the country into recession.

“We were conscious of the fact there was a problem out there but we made a call that Ireland would probably escape it and we were totally wrong,” he said.

The ESRI is one of the government’s key economic advisory bodies and claims independence, although it receives a big share of its funding direct from various departments.

Source: Sam Boal/Photocall Ireland

Property industry ‘like a tumour’

FitzGerald said 2003 had been a “turning point” in Ireland’s economic growth when it “moved into a new and dangerous phase” as local banks started to borrow heavily overseas to fund booming demand for home loans.

The point of no return came in 2006 when regulators probably had their last chance to stop the rapid ramp-up of debts, he said.

The build-up of the bubble could have been prevented by appropriate fiscal policy or by appropriate prudential action by the Central Bank and the regulator, or both. Either one of these policy instruments, if appropriately deployed, could probably, on its own, have prevented disaster. Both together would have prevented disaster.”

FitzGerald said the construction sector had a that stage become “like a tumour which grew and grew and squeezed the rest of the economy”, drawing resources from important export industries.

“That killed off a significant number of firms and jobs … jobs that didn’t seem important at the time – no-one noticed the jobs were going, there were no headlines – but we really need those jobs today,” he said.

File Photo A new report from the Housing Agency has projected that a minimum of almost 80,000 residential units are required in urban areas to support the population over the next five years. Source: Mark Stedman/Photocall Ireland

About that bank guarantee…

Last week US professor William Black said Ireland’s regulators also “did an enormous disservice to the nation” when they declared the banks solvent before the infamous bank guarantee.

He described that decision to offer a blanket assurance for all the banks’ debts as “the most destructive own goal in history”.

FitzGerald said the ESRI wasn’t consulted over the bank-guarantee decision and relations between the think-tank and government officials had grown “frosty” before that time.

He said he had contacted the Central Bank in 2006 and 2007 with his worries to no avail, while he also pointed the finger at the Finance Department for paying more attention to politics than good policy.

 There was a cultural change in finance I think in the last decade – they became more concerned about the politics of things and less interested in the technical detail,” he said.

READ: After weeks of boredom, the banking inquiry could get very interesting today >

READ: The Great Recession had a HUGE impact on Ireland’s young people >

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About the author:

Peter Bodkin  / Editor, Fora

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