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Cowen starts with an apology: “I accept full and complete responsibility for our role in, and response to, [the] crisis.”

Cowen says the government was left “in no doubt” that burning bondholders would have meant no funding from the Troika, stating: “It was one or the other.”

In terms of the guarantee, he said it was a case of taking the least worst option available. 

Cowen on property prices, an issue of contention at yesterday’s hearing with Charlie McCreevy:

“When I was Minister for Finance, I shared the positive view of our prospects which was held by all the main research and international agencies. But contrary to what some are now trying to suggest, I was concerned about the potential vulnerabilities and risks arising from the rapid escalation in property prices which was a recurring theme in risk assessments.”

It has since been alleged that no action was taken by our Government to deal with these risks. This seems to be based on a view in some quarters it seems that I was in some way beholden to property market interests. This is simply not true. The facts are that prior to any signs of an emerging international crisis, there were four important actions taken to attempt to minimise the potential vulnerabilities in the banking sector related to the dependence on highly valued property.

The four actions taken were:

(i) The decision in December 2005 to abolish a very wide range of property based tax incentives.

(ii) The refusal by the Government to abolish or dramatically reduce stamp duty.

(iii) The decision of the Financial Regulator in early 2007 to increase the capital requirements on banks for speculative property lending from 100% to 150%.

(iv) The decision by the Government to allocate 1 per cent of GNP every year into a National Pensions Reserve Fund.

Here are Cowen’s thoughts on stamp duty:

In late 2006 and up to the General Election in June 2007, I was also the subject of sustained criticism for my decision as Minister for Finance to resist widespread demands to abolish or dramatically reduce stamp duty on property.

At that time, I accepted that the levels of stamp duty in Ireland were among the highest in the world and that this meant real consequences for people buying houses. While I agreed that some adjustments were appropriate, I realised that the high levels of stamp duty were a break on the escalation of property prices and acted as a disincentive to greater property speculation.

I felt that calls for the abolition or serious reduction of stamp duty were simply irresponsible in a context of rapid property price growth. I therefore strongly resisted such demands.

There is no doubt abolishing/reducing stamp duty at that time would have been politically popular. But it also would have increased the vulnerabilities of the banking system and the Irish economy to overvalued property. I therefore refused to go down this route. I was subject to much criticism for this. It is hardly surprising today that the cheerleaders for the abolition of stamp duty, or its radical reduction, are now silent on what would have been the impact on property prices or the resultant impact on the scale of banking crisis had I heeded their calls.

Cowen on *that* report by Morgan Kelly:

I was not aware of contrarian views within the Department of Finance which
differed in substance from the Department’s overall assessment.

Regarding external contrarian views, the most notable was a research paper by
Professor Morgan Kelly of UCD which was published by the ESRI when it launched the
ESRI Summer Quarterly Economic Commentary Review of the Irish economy in July
2007.

In an interview on publication of the review, ESRI economist, Dr Alan Barrett made
it clear that the ESRI did not share Professor Kelly’s prognosis that house prices in
Ireland over the following 8 years could drop between 40% and 60% in value.

Whilst the ESRI thought that house prices were overvalued by 15%-20%, it did not believe there was going to be a sharp fall in house prices. It was forecasting a house price decrease of 3% for 2007 with it stabilising the following year. The ESRI view was that economic growth would be 4.9% in 2007 moderating to 3.7% in 2008, a growth rate
which they said was consistent with a degree in stability in house prices in 2008.

The mainstream view remained amongst most commentators that house price increases had been underpinned by many factors including a strong economy, increases in employment and earnings, reductions in taxation and lower interest rates resulting from
participation in monetary union.

Professor Kelly’s more pessimistic view proved to be more accurate as we now
know although in his paper he saw the main macroeconomic effect of this as being higher
unemployment due to reduced house building activity as prices fell over the period in
question. He states in the paper that he remained of the view that Irish banks were well
capitalised at the time.

Cowen on *that* report by Morgan Kelly:

“I was not aware of contrarian views within the Department of Finance which differed in substance from the Department’s overall assessment. Regarding external contrarian views, the most notable was a research paper by Professor Morgan Kelly of UCD which was published by the ESRI when it launched the ESRI Summer Quarterly Economic Commentary Review of the Irish economy in July 2007.

“In an interview on publication of the review, ESRI economist, Dr Alan Barrett made it clear that the ESRI did not share Professor Kelly’s prognosis that house prices in Ireland over the following 8 years could drop between 40% and 60% in value.

“Whilst the ESRI thought that house prices were overvalued by 15%-20%, it did not believe there was going to be a sharp fall in house prices. It was forecasting a house price decrease of 3% for 2007 with it stabilising the following year. The ESRI view was that economic growth would be 4.9% in 2007 moderating to 3.7% in 2008, a growth rate which they said was consistent with a degree in stability in house prices in 2008.

“The mainstream view remained amongst most commentators that house price increases had been underpinned by many factors including a strong economy, increases in employment and earnings, reductions in taxation and lower interest rates resulting from participation in monetary union.

“Professor Kelly’s more pessimistic view proved to be more accurate as we now know although in his paper he saw the main macroeconomic effect of this as being higher unemployment due to reduced house building activity as prices fell over the period in
question. He states in the paper that he remained of the view that Irish banks were well
capitalised at the time.”

Cowen on *that* report by Morgan Kelly:

“I was not aware of contrarian views within the Department of Finance which differed in substance from the Department’s overall assessment.
Regarding external contrarian views, the most notable was a research paper by Professor Morgan Kelly of UCD which was published by the ESRI when it launched the ESRI Summer Quarterly Economic Commentary Review of the Irish economy in July 2007.

“In an interview on publication of the review, ESRI economist, Dr Alan Barrett made it clear that the ESRI did not share Professor Kelly’s prognosis that house prices in Ireland over the following 8 years could drop between 40% and 60% in value.

“Whilst the ESRI thought that house prices were overvalued by 15%-20%, it did not believe there was going to be a sharp fall in house prices. It was forecasting a house price decrease of 3% for 2007 with it stabilising the following year. The ESRI view was that economic growth would be 4.9% in 2007 moderating to 3.7% in 2008, a growth rate which they said was consistent with a degree in stability in house prices in 2008.

“The mainstream view remained amongst most commentators that house price increases had been underpinned by many factors including a strong economy, increases in employment and earnings, reductions in taxation and lower interest rates resulting from
participation in monetary union.

“Professor Kelly’s more pessimistic view proved to be more accurate as we now know although in his paper he saw the main macroeconomic effect of this as being higher unemployment due to reduced house building activity as prices fell over the period in question. He states in the paper that he remained of the view that Irish banks were well capitalised at the time.”

Cowen on his “appropriate” relationship with the banking and property sectors:

“The relationship of the Department of Finance with the banking sector and the property sector was primarily through their federations: the Irish Banking Federation (IBF) and the Construction Industry Federation (CIF)

“Individual banks dealt with the Department through contact with the relevant officials. My own interaction with banks was seldom and infrequent. Every year the Minister for Finance would receive many pre-budget submissions in writing from economic and social actors including the IBF and CIF. The main groups would be met every year by the Minister for Finance at meetings attended by officials where oral presentations would amplify the written submissions put forward.

“The incumbent Minister for Finance would always be a guest speaker at IBF annual dinners or an industry awards ceremony.”

In my time as Minister for Finance, I regarded my relationships with these two sectors as being appropriate. Their access to the Department was in no way different from how other organisations of economic importance were dealt with.

Cowen says he thinks he was experienced enough to become finance minister given the other portfolios he handled, but admits: “I’m not a qualified accountant, which probably is helpful.”

Committee chair Ciarán Lynch asks Cowen if then Taoiseach Bertie Ahern informed him ahead of time about an April 2007 Sunday Independent interview about changes he planned to make to stamp duty if Fianna Fáil was returned to power.

Cowen replies: “Absolutely. We were very close.”

Earlier, Cowen noted that he resisted increasing pressure to abolish stamp duty.

Cowen admits that a property bubble did develop during his time as finance minister, but said it was due to a number of factors – not just property tax reliefs.

Things are getting a bit feisty, as Cowen clashes with Fine Gael’s Kieran O’Donnell about why he repeatedly increased spending.

Cowen says he was looking at Ireland’s long-term future by investing in skills, people and infrastructure.

He said this resulted in the “most-educated generation in this country, thankfully who’ve been able to bounce back from the very calamitous situation”.

With hindsight, Cowen says “of course” he would have done things differently.

When Joe Higgins asks Cowen about the Financial Regulator and IFSC, Cowen says Ireland’s problems began “on main street, not in the IFSC”.

Cowen stated that the government “didn’t set up a statutory framework that meant jobs couldn’t be done”, adding jobs weren’t done – for various reasons.

Screenshot 2015-07-02 at 11.19.55 AM

Higgins then accuses Cowen and co of “encouraging the worst excesses of the banks”.

The former Taoiseach strongly denies this.

Higgins quotes lines from a speech Cowen gave at the annual dinner of the Institute of Bankers in Ireland on 2 November 2006:

“Of course, not all of these brave new initiatives are successful. It’s a hard game, but there’s all to play for. Of course that’s easy for me to say because you are players on the field and I’m just an ardent supporter on the sidelines. I will continue to wear your colours.”

Screenshot 2015-07-02 at 11.23.36 AM

Higgins says Cowen, as Minister for Finance, wasn’t on the sidelines.

***GALWAY RACES TENT ALERT***

When Higgins raises the issue of Fianna Fáil’s infamous hospitality tent at the Galway Races, Cowen says some people viewed the tent as a cover for “collusion”, but this wasn’t the case.

“There was no big deal.”

You couldn’t pick a winner in the Galway Races tent, never mind anything else.

“You’re setting me up as some sort of guy who is promoting cowboy speculators … I don’t travel in those circles.”

Fianna Fáil Senator Marc MacSharry asking if ministers have a tendency to be more probing when they are first appointed, but lose this streak somewhat a year or two into the job.

Screenshot 2015-07-02 at 12.53.10 PM

Cowen says he doesn’t think this is the case, denying he and the government were in power so long they were on “autopilot”.
MacSharry asks if ministers become too “reliant and trusting” of the advice of others, to which Cowen says people in government, like any organisation, soon realise whose advice they can rely on and who isn’t up to the job.

In his opening statement, Cowen said the Department of Finance didn’t see its role as “second guessing the work and assessments of the Central Bank and Financial Regulator’s office”.

Screenshot 2015-07-02 at 1.01.27 PM

“The Central Bank and the Financial Regulator’s office had significant resources in dealing with the supervision and regulation of the lending institutions.”

Sinn Fein’s Pearse Doherty asks Cowen what he did to try and stem an “explosion of credit in the financial market” and the “massive increase in house prices”.

“What did you do to curtail the property bubble?”

Screenshot 2015-07-02 at 1.29.05 PM

In response, Cowen says it was the the Financial Regulator, not him, who had the statutory authority to step in in relation to lending growth “if they felt it necessary”.

He said he was glad when they acted and sorry they hadn’t done so sooner.

In terms of what he DID do, Cowen noted that he initiated an “orderly wind down” of property tax incentives.

In response to Cowen saying his friends are not well known, Labour Senator Susan O’Keeffe asks him about the “frequent” visits of former Anglo director Fintan Drury to his office while in government.

He says they have been friends for nearly 20 years and didn’t discuss banking during those conversations.

As the inquiry is now in private session before breaking for lunch, we’re going to wrap up the liveblog. Thanks for staying with us.

You can follow @TJ_Politics for updates this afternoon.

Screenshot 2015-07-02 at 2.43.08 PM

About the author:

Órla Ryan

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