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Column: In Ireland, we got the bankers we deserved

Banks and property developers held the reins as the country galloped into economic crisis – and all because we put them in the saddle, writes historian Conor McCabe.

Cranes fill the Dublin skyline during the boom in 2005
Cranes fill the Dublin skyline during the boom in 2005
Image: Leon Farrell/Photocall Ireland

THERE HAVE BEEN more than a few attempts to explain why the Irish banking crisis developed the way it did, and the argument that it was due to a breakdown in moral standards is quite a popular one.

The Irish Times talked of a “frightening lack of morality” within Anglo Irish Bank, the most indebted of the Irish institutions, and how the actions of its chairman “cast a shadow over the ethical culture of the bank he ran for most of the past 33 years.” The newspaper’s senior business correspondent, Arthur Beesley, said that the directors of Irish Life and Permanent inhabited an “ethical cocoon in which the sense of right and wrong is at odds with standards in the outside world”, while the economist Brian Lucey talked of the immorality of the Government’s actions in pouring money into Anglo Irish Bank in a desperate attempt to keep it going as a business concern.

Yet, the banking crisis in Ireland was not caused by pockets of immorality in an otherwise reasonably well-functioning system. The ruthless pursuit of profit is not personal; that is the way business works. And what is condemned as immoral in times of crisis, is often praised as savvy and pragmatic in times of prosperity.

Similarly, there is nothing particularly unique about the ethical cocoons of Irish bankers, their frightening lack of morality, or lack of restraint and sense of propriety. This was a world-wide financial crisis, after all, not a regional or a Celtic one. In other words, it was not the implosion of speculative debt, but the ability to transfer that debt wholesale onto the shoulders of the State, which marked out Irish bankers as a step above their world-wide contemporaries.

The decision by the Irish Government on 30 September 2008 to guarantee almost all the liabilities of six Irish financial institutions was not an economic decision but an exercise in power. “The deeper truth exposed by the present crisis,” wrote the journalist and politician Shane Ross, “is that Ireland harbours more powerful forces than Fianna Fáil.” And while this is true, it is not enough to point out that banks and property developers are indeed powerful in Ireland. We have to explore why that is the case.

At the time of its independence, the Irish Free State was a fully-integrated part of the UK economy. Its role within that economy was primarily agricultural – more specifically, to do with the provision of livestock for the finishing farms and slaughterhouses of England. The Free State was now an independent country without an independent economy.

In order to secure its future, it needed to expand its industrial base and develop new markets. For this it needed credit, something that a central bank based around a national currency could provide. The Irish banking system, however, was entirely focused towards the London financial markets, and resistant to the development of a national currency focused on the economic demands of the state. The need to expand agricultural and industrial output, in order to provide an economic base for sustainable communities, was pushed to one side. The result was increased emigration, with the Free State providing not only cattle and finance to the UK, but also a steady stream of labour.

The rise of Fianna Fáil

After Fianna Fáil rose to power in 1932, the party kept the parity link with sterling. The structural deficiencies within Irish agriculture remained untouched. The demands placed on the Irish economy in order to maintain parity included periodic deflations, which were timed in line with the dynamics of the British, not Irish, economy. By the end of the 1940s the Irish state was more dependent on Britain then it had been at the time of independence.

In 1952 the Irish government commissioned a report from the American consultancy firm, Ibec Technical Services Corporation. Its authors simply could not understand why the state persisted in exporting livestock to Britain, given the potential for industrial growth which the slaughter and processing of animal produce would provide. Similarly, the practice by Irish banks of investing in British securities with the full support of the central bank and Irish government seemed bizarre, given the fundamental need for credit and investment in Ireland.

The calls by Ibec for an expansionary policy, with a fully-funded central bank using deposits to underwrite the Irish pound and provide credit, as well as an agricultural policy which would see the creation of a viable and profitable food processing industry on Irish shores, were dismissed in favour of the pursuit of foreign investment.

Such a move allowed the Irish state to appease the banking sector and its cheerleaders in the Department of Finance. It allowed credit and foreign investment to enter the Irish economy without a revaluation of the Irish pound – something that was needed in order for indigenous businesses to attain the level of credit needed for sustainable growth. The state was on a path to industrial expansion, but one which was centred on tax breaks and financial incentives to multinational companies, and not necessarily the development of local industry and Irish-sourced exports.

The expansion in financial investment, construction and land sales gave rise to a particular type of Irish capitalist entrepreneur. There was money to be made by providing services to foreign investors. Construction, banking, insurance, property, road haulage, and legal services – these were the areas of commercial activity that gained a commanding presence in the Irish economy, all of which directly benefited from the influx of American, German, British and Dutch companies.

At the same time, there was also money to be made by speculating on the boon to the economy which foreign investment brought. The state started to provide these entrepreneurs with a similar range of grants and tax incentives as those offered to multinationals. In the case of office blocks in the 1960s, the state not only funded the speculation, it acted as tenant as well. The PAYE system, first introduced in the late 1950s, became a cash faucet for the government. The revenue generated through the direct taxation of ordinary workers was fed directly to speculators and foreign investors via the litany of tax havens which propped up these new industries.

Construction, finance, land and law: this was the four-leaf clover, the new lucky charm for the modern Ireland of Lemass.

The religion of exports

By the 1970s the trick of foreign investment, and speculation on same, was running out of steam. Growth in the Irish economy relied more and more on construction, both commercial and residential. The notion that secondary ‘feeder’ industries were just as important as multinationals to the development of the economy was given lip-service but little else. (This is still the case, as was shown by the figures for GDP and GNP which were released last week. Ireland’s net exports grew by 20 per cent from the first quarter of 2010 to the first quarter of 2011, while demand in the domestic economy declined by 3.1 per cent. The figures make a farce of the almost-religious belief in export-led growth which is held across the political spectrum.)

The growth in building societies and the entry of banks into the private mortgage market took place alongside moves to strangle public housing as a viable option for working people and the increased use of tax incentives to bolster owner-occupancy as the only real option open to families. Housing was increasingly portrayed as a cure for all social ills, a bulwark against inflation, a nest-egg for retirement, a foolproof pension plan for the honest worker. It was also a multi-billion pound industry, where standards and security played a very minor role.

The 1974 Kenny Report into the price of building land was shelved precisely because it threatened to upset the speculation machine. It threatened the livelihoods of the various politicians, bankers, builders and landowners who profiteered from the rezoning game. By 1981 only eight per cent of all materials used by foreign companies in Ireland were sourced from Ireland. This was in spite of repeated calls by foreign companies for the development of secondary industries to act as feeders for production.

The Irish entrepreneur as middleman was firmly, and fatally, entrenched in the way the economy functioned. Construction and services can only work as an aid to growth – in Ireland they had become growth itself. In the late 1980s, the widening of Ireland’s tax relief schemes to include financial services helped to turn the state into a glorified offshore bank. Incredibly, it became a tax haven for Irish financial and commercial businesses. Ireland had become its own tax haven.

The decision by the Irish government in 2008 to guarantee almost the entire deposits and liabilities of the Irish banking system was everything people saw it as at the time: a bailout of well-connected bankers, speculators and builders – the dominant strands of Irish economic and political life. We need to understand why things happened the way they did, and to recognise that the old ways of doing business are not going to help us. It falls on us to make different choices if we want different results.

Dr Conor McCabe is a historian who writes at Irish Left Review. His latest book, Sins of the Father: Tracing the Decisions That Shaped the Irish Economy, is published by History Press Ireland and is also available here.

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Conor McCabe

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