Jill Kerby

WILL THE ESRI SEE THE NEXT CRASH COMING?

The retired ESRI economist John Fitzgerald conceded last week at the banking inquiry that the government funded think-tank didn’t see the 2008 banking crash coming, and wasn’t robust enough in its warnings to the Financial Regulator and Central Bank about the risks to the economy from the overheated property sector.

Yet, after looking back at my own computerized archive of articles from 2000, and the hundreds of reports which I received from 2000 from the likes of the ESRI, the Central Bank, retail and investment banks, stockbroking companies and the private financial newsletters I subscribe to, it’s pretty obvious that just about everybody knew that the growing volume of bank lending during the Celtic Tiger period was going to end badly - eventually - for all the parties who had helped to inflate the great Irish property bubble.

I’ve found references in my own articles from as early as 2002 that the Central Bank and ESRI (which was compiling the monthly property price index with PTSB) were concerned about surging prices - even during the mini-recession of 2001-2003 when employment actually fell, public sector hiring was frozen and Charlie McCreevy brought in sharp spending cuts, that eventually lost him his ministerial job here and the transfer to the EU Commission. 

A very well know investment manager, Frank O’Brien published a widely publicised book, The Purposeful Investor at the same time, that the ESRI and central bankers could not have missed. In it he identified how booms and bust cycles happen. They need ‘an unusually profitable opportunity, leveraged debt, greed and euphoria [and] “the naked exploitation of the gullible.”

Six months later, in March 2003, the Central Bank issued a report that warned that property lending was getting out of hand in an economy where other indicators – including rising unemployment and inflation – suggested a slowing economy. Why was that?  Because ECB eurozone interest rates were still too low – set for Germany’s continuing reunification needs, not ours - and facilitating encouraged too much lending and borrowing (of German savings) in Ireland.

By April 2004, the boom was back and the ESRI/PTSB house price index reported that Dublin and regional house prices were up 11.8% and 13.5% respectively. “Mortgage values are growing by one billion euros a month…” and included their warning that “if something doesn’t give, we could end up in the same scenario that happened in the UK in the early 1990’s where a property crash left thousands of people with mortgages that were worth more than their properties.”

My files show that during 2004-05 the ESRI and the Central Bank each published a number of other reports about the extraordinary level of secured and unsecured debt that Irish people were taking on and warned about what would happen if interest rates went up: rising unemployment would negatively impact on the ability of people to pay their huge mortgages. Prices would fall.

Where the Regulator completely fell down was from 2006 by not even thinking to join up the dots between excessive credit lending for property which the ESRI was tracking every month with PTSB, and the health of the banks.  Despite the US sub-prime property bubble finally hitting its pin and beginning to deflating from 2005 bringing down big and small US banks and sub-prime lenders with it – official Ireland stuck to the “soft landing” idea, even keeping up the illusion throughout 2007 and 2008.

The economic analysts at the ESRI even “predicted” a stronger economy in 2009.

I bring this up only because more bubbles have been blown up since Lehman Bros collapsed in October 2008.  Outstanding debt is even greater than it was pre-2008; bond prices and stock market prices have never been higher, the latter pumped up by trillions-worth of money printing (QE) by central banks in the hope it will kick-start floundering. deflating economies. (No amount of kicking looks like it will resurrect the Greek economy.)

I haven’t found too many recent new bubble warnings from the ESRI. Yet I’m reading many more warnings outside of Ireland about how stock markets have achieved historic highs in 2014 – it exceeded 20,000 for the first time in August 2014 - how property bubbles are being blown up again and even art is exceeding all past historic prices: someone paid €265 million for a Paul Gauguin painting.

In March, the ECB will start €1.1 trillion worth of QE. Will it work? Or will it just blow up all the bubbles even further…until they eventually meet their pin?  What will that mean – when that happens – to our property prices, pension values, share prices?  Are we looking at 2008 all over again, only hugely magnified?

Most of us would be grateful just to know where to get a decent return on our devalueing euro denominated savings and safe assets for our pension funds. But if the ESRI is to justify its continued existence it might also try and present an informed and impartial view of the big economic picture – geo-political warts and all. 

What nobody ever wants to hear again is, “We never saw it coming”.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.