Belfast Telegraph

Some comfort in a reminder that we are not alone

By Brendan Keenan

It is nice to come across somebody who literally knows the meaning of “literally”. Andrew Haldane, who is in charge of financial stability at the Bank of England, is one who does.

He stressed the point in an address to the Institute for International and European Affairs in Dublin last week. It means “according to the strict meaning of the words”. And, said Mr Haldane, the world literally cannot afford another crisis like the one we are going through.

I hope I know what “literally” means, but I did not know some of the figures Mr Haldane produced to support the claim. The most shocking, perhaps, was that the permanent loss of output from the crash will be at least $50trn and might be as much as $200trn. That is between one and four years worth of world production of goods and services.

This idea of a permanent loss of output is familiar to economists, but a bit of a shock to the rest of us. The fact is that, in a recession/depression, some lost jobs are never replaced, and some closed firms never reopen, so the economy's productive capacity is reduced.

Last Thursday's estimates of 100,000 net emigration over the next two years gives another twist to the screw where Ireland is concerned.

When people leave the country, their potential as workers and consumers is lost. On past form, many will come back if conditions are favourable, but not if it takes too long for that to happen.

Curiously, though, Mr Haldane seemed to cheer up his Dublin audience, even though his figures showed we are all drinking at the last-chance saloon. Perhaps the key word here is “all”. We are an insular people and one could often be forgiven for thinking that this had only happened to us. That is far from the case.

(A corollary to that way of thinking is that many of the popular solutions involve unilateral action by Ireland, whether it be burning bondholders, defaulting on debt, or resurrecting the punt. Any of that, if done alone, would have the most profound international repercussions. And it does not help that no-one can say what they would be).

Of course, the Irish financial bust is the worst in the euro area — and beyond. But people at last week's event seemed glad to be reminded even that it is the worst among many.

Mr Haldane put the cost of total government support to the banking system at $15trn — so far.

That is an incredible 13% of global GDP. Given that much of the world did not have a direct financial crash, it shows the scale of the carnage among the countries that did.

It also makes the “worst-case scenario” (of 50% of Irish GDP going to finance government supports) look both more likely, and somewhat less outrageous.

Looking at such figures, it becomes difficult to believe that any Irish government or regulator could have prevented some kind of bubble from inflating.

The nature of banking itself was transformed in the past 30 years. It became enormously bigger, and enormously more concentrated. Banking as a share of the US economy increased fourfold, and the share of that taken by the biggest banks also increased fourfold. This was accompanied by an exponential growth in financial dealings within the global banking system.

It now appears that AIG, the giant insurer whose failure threatened the entire system, was probably solvent after all. It was just that no-one, neither bankers nor regulators, could be sure that it was.

This immense, opaque system meant there was unlimited credit for all comers. One did not even have to be in the euro.

Hungary and Latvia filled their boots, and are now left with foreign currency debt to add to their woes. Someone was offering us all the money we wanted, and someone would have had to say we weren't getting it.

Bertie Ahern? Brian Cowen? Patrick Neary, John Hurley? The bankers themselves? The list of people who theoretically could have called a halt is short, and implausible. The politician or banker who would do that has not been born — and the historical examples of regulators doing it are sparse indeed. There were no high-profile examples for the Irish regulators to cite, even if they had a mind too. The Bank of Spain had to keep quiet about asking banks to keep large bad debt reserves, in defiance of accounting rules. The Germans said little about their stringent loan to value rules, and let their banks run riot overseas.

I have doubts about any Irish regulatory body ever openly defying the wishes of an Irish government. The Central Bank is in one of the best positions to do so — but without Frankfurt, New York or London leading the way, there probably was no chance.

Belfast Telegraph

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