Bertie

by Colm Keena

  The first person who I heard raise really serious concerns was Morgan Kelly, down the corridor here. In fact at the time Morgan’s office was [near Laffan’s in UCD]. Our administrator, Mary Buckley, said, ‘Would you keep him away from me? He’s terrifying me.’ He was the first. He looked at the history of housing bubbles and came to the obvious empirical conclusion that they always end the same.

  The view within the NESC, according to Laffan, was that if the Irish economy imploded it would be because of a global implosion. In other words, domestic policy was fine. A commonly held view among economists and economic commentators, many of whom worked for financial institutions, was that there would be a soft landing. ‘People convinced themselves that this time it is different,’ said Laffan. ‘It must be deep social psychology. It is not rational.’

  Morgan Kelly’s first powerful broadside appeared in the Irish Times in December 2006.

  Offering no evidence except wishful thinking, estate agents and politicians assure us that we have nothing to worry about: the Irish housing market can look forward to a soft landing. If, however, we look at what has happened to other small economies where sudden prosperity and easy credit drove house prices to absurd levels, we should be very worried indeed. If experiences of economies like ours are anything to go by, we may be looking forward to large and prolonged falls in real house prices of the order of 40 to 50 per cent and a collapse of house building activity.

  In July 2007 Kelly followed up his article with a paper published by the ESRI in which he said that up to 60 per cent could be wiped off the value of Irish housing over an eight-year period. Kelly had studied almost forty property booms and crashes that had occurred in the OECD countries since 1970. ‘Typically real house prices give up 70 per cent of what they gained in a boom during the bust that follows,’ he wrote. However, he pointed out that because of the strong growth in new houses built in recent years and the number of housing units lying empty, the housing bust in Ireland had the potential to be worse than the OECD average.

  The paper was a serious contribution by a professor of economics published by Ireland’s premier research institute—an institute founded by one of Ahern’s predecessors in an effort to improve policy performance. Ahern gave his response to the article, and to other warnings that were by then emerging, in an aside to an address to the ICTU on the day the Kelly paper appeared.

  Sitting on the sidelines or on the fence, cribbing and moaning, is a lost opportunity. In fact I don’t know how people who engage in that don’t commit suicide. The only thing that motivates me is to be able to actually change something.

  Ahern’s comment on suicide elicited laughter and clapping from his audience, though he later apologised and said it was well known that he was very involved with the Suicide Action Group. He said he had only meant to get at people who are ‘always against things and looking around at things.’

  It wasn’t as if he changed his tone as the concerns about the housing sector grew more widespread. In September 2007, at the annual Fianna Fáil think-in, Ahern spoke out about people ‘talking down the economy’ and referred to recent comment that the economy was in danger of collapse. ‘I don’t know which wizard wrote it,’ he said. ‘How can you talk about an economy collapsing and it growing by 6 per cent?’

  By this time Kelly had moved on to consider the effect of a sharp property downturn on the banking sector. ‘Banking on very shaky foundations’ was published in the Irish Times on 9 September 2007. Kelly pointed out that, while mortgage lending had been slowing since the middle of 2006, lending to builders and property developers was continuing to grow rapidly. In the previous year such lending had increased by €20 billion, to €100 billion, with €20 billion being the equivalent of the share capital of the Bank of Ireland. All the Irish banks’ capital, and a substantial chunk of its depositors’ cash, was now riding on these loans. Since 2000 lending to construction and real estate had risen from 8 per cent of Irish bank lending, a European norm, to 28 per cent. Just before the Japanese bubble burst in 1989, bank lending to the sector stood at 25 per cent. Japan had not yet recovered. International experience showed that when markets turned, developers tended to walk away, leaving the banks, and often the exchequer, to pick up the pieces. Since the beginning of the year, he said, sales of new homes had not slowed: they had collapsed. Yet 80,000 new ‘units’ were due to be completed in 2007, and a further 60,000 were on stream for the following year. The Government’s decision to abolish stamp duty for all first-time buyers, intended as a fillip to the housing market, had meant that young people found buying second-hand houses as attractive as buying new ones. According to Kelly, it had put an unintended final nail in the coffin of the new homes market.

  He raised the prospect of the state having to bail out the banks, as had happened in Japan and Finland in recent years. His estimate, €15 billion to €20 billion, was far short of what would eventually turn out to be the case. He then said:

  You probably think that the fact that Irish banks have given speculators €100 billion to gamble with, safe in the knowledge that taxpayers will cover most losses, is a cause for concern to the Irish Central Bank, but you would be quite wrong.

  But Ahern wasn’t listening to university professors or other disinterested observers. Just as he had an apparent dislike for blue-blood Fianna Fáil politicians, he had an aversion to academics and intellectuals. He and his party’s fund-raising operations always had a close connection with the building sector, and during the property bubble years some of these people became enormously wealthy (or certainly appeared to be). They flew around in helicopters, had palatial homes, got married on yachts formerly owned by Greek shipping magnates. Many, if not most, were men who had finished their education after secondary school: self-made men. They crowded around Ahern at his annual dinner in the Kilmainham Castle and in the party’s Galway tent fund-raiser.

  The annual shindig at the Galway Races became a symbol during the Ahern years of the connection between the builders and his party. It was an in-your-face phenomenon, with the people who gathered to drink champagne with the country’s political leaders the beneficiaries of the multiple tax schemes that continued to exist right through one of the most sustained property booms in the Western world since the end of the Second World War.

  Ahern’s character as revealed in the witness box of the Mahon Tribunal was that of a man who foresaw difficulties long before they bubbled to the surface and who devised strategies for dealing with them long before most others knew of their existence. He was an intelligence man, a man who sought information, studied it, absorbed it and linked it together. Yet he genuinely appears to have been unaware of the grave financial dangers that were created during his second Government. According to Rabbitte, Ahern’s focus on the political aspect of everything is part of the explanation for this. He also believed that Ahern’s habitual wariness and worry was more focused on his own personal situation, and on the financial skeletons in his personal cupboards, than it was on dangers to the well-being of the state.

  He had access to anyone in the country, but he didn’t seek out the advice of people he didn’t want to hear from. I was always immensely impressed by Bertie’s grasp of detail, despite what people might think, and it came not just from doing his homework. No Irish politician ever, in the history of Ireland, including Daniel O’Connell, had such frequent interaction with so many people. You could see at ordinary, boring question time, as distinct from leader’s question time, that Bertie had hoarded the detail that had been whispered in his ear when he was at a party event in Clonakilty and the local builder or businessman told him something, or when he was at an IBEC dinner and they told him something, or a trade union leader told him something.

  Ahern had a tremendous facility to absorb and regurgitate data.

  For every economist or ESRI paper that warned him of the dangers that existed, there were scores of bankers and property developers and local politicians telling him the opposite, said Pat Rabbi
tte.

  The builders were whispering in his ear, ‘Don’t listen to that bearded academic [economist John FitzGerald], sure he’s fucking Garret’s son, what do you expect? Let me tell you about the project I have, Bertie. I have this project in Chicago; I’m gone to Canary Wharf now. I’m going to do a marvellous job on the quays.’ I mean they had direct access to him . . . The show he ran out of Luke’s is a temple to modern-day lobbying. I mean the people who mattered got in there to tell him what they thought. Bertie was there for a long time, and all the evidence was around the place that those guys were right in the past, so why shouldn’t they continue to be right?

  For Rabbitte, the Galway tent, in the main treated lightly by the media and the general public during the boom years, was a terrific representation of how Ireland was governed during Ahern’s tenure. Haughey, he said, would never have got away with anything so vulgar. ‘There is no Calvinist tradition in Ireland,’ according to Rabbitte. ‘If people had a job and things were going well, they were willing to turn a blind eye.’

  Miriam Lord used to attend the Galway races each year and report on who was in the tent. At first, she says, there were people such as the millionaire tax exiles Michael Smurfit and J. P. McManus there, but they drifted away, and it became the haunt mostly of builders, developers and auctioneers. She doesn’t think many deals were done there. ‘It was more like a dating agency for developers and politicians, an introduction service, where they can touch base and exchange numbers.’ Later again some people decided it wasn’t good for them to be seen there, and they began to stay away, though most didn’t care. ‘Near the end it got such a bad name, it was always oversubscribed, but it was a lot of PR companies bringing clients who wanted to be able to say they had been in the Galway tent, even though there was no-one of any great note there, apart from Bertie and the occasional minister.’

  However, the lavish parties thrown by the developer Bernard McNamara for his guest of honour, the Taoiseach, continued to the end.

  There would be a big party in Bernard McNamara’s penthouse suite in the Radisson Hotel, I think on the Thursday night. Ahern was paraded around as the guest of honour. There was always a lot of vulgarity. One of the prime movers was always asking if I wanted a lift in the helicopter anywhere. There was a lot of them staying in Ashford Castle and places like that, and they would come up on the chopper.

  At the McNamara parties you could have anything you wanted. There would be about sixty guests. Bollinger champagne was freely available. The penthouse had a panoramic view over Galway Bay.

  Near the end the atmosphere was very strange. The final year he had that reception there was a strained atmosphere; people knew the good times were maybe coming to a close, and Bertie’s troubles were beginning to emerge, so there was a feeling that things were maybe on an edge.

  Chapter 17

  AHERN, EUROPE AND MONETARY UNION

  In the wake of the Irish banking collapse—perhaps the greatest ever in relation to losses as a proportion of a country’s economy—the Government commissioned an inquiry into how it could have happened. Prof. Patrick Honohan had been appointed Governor of the Central Bank, the first holder of the office in a long time who was not a former secretary-general of the Department of Finance. (Ireland’s practice of appointing former secretaries-general was an exception in Europe, where it was seen as contrary to the fostering of independence.)

  Seen from the Fianna Fáil backbenches, Honohan was an outsider. While the party, and Ahern in particular, had shown an aversion to informed public debate and analysis during the period 1997–2008, Honohan was the sort of man who was most happy in an economics workshop exploring the solidity of the arguments being put forward. His appointment, brought about by the depth of the crisis in which Ireland found itself, was part of a process whereby the dislike of data and argument that had marked the previous decade was swapped for the opposite.

  As part of the inquiry, two outside experts, Klaus Regling and Max Watson, were appointed to draft a report on the international and domestic backdrop to the disastrous performance of the Irish banking sector. The report in turn led to a consideration of its contents by an all-party committee of the Oireachtas, the Committee on Finance and the Public Services, which received assistance from a professor of economics at Trinity College, Philip Lane. The committee reported in November 2010 and recommended such measures as multi-year budgets and the establishment of independent councils that would comment on the economy and the performance of budgetary policy so as to generate a more informed budgetary debate. (The distance between this idea and the practices of McCreevy is worth dwelling on.) The report recognised that during boom periods the public finances should be run in a counter-cyclical way. In other words, the public finances should be used to cool booms and counter economic slowdowns. A rainy-day fund would be created, into which money would be put during boom years, thereby dampening economic growth during the upswing in the economic cycle. The money could be used to stimulate the economy during slumps and would stop the state having to go to the markets to borrow. It also envisaged a lot more economic data being collected and analysed, and the boosting of the intellectual performance of the Department of Finance.

  Almost everything in the report was an implicit criticism of the way the state was run during the Ahern Governments. ‘The setting of formal fiscal frameworks forces government policy to avoid short-termism or “capture by elites”.’ In the press release accompanying the report it was stated that in a single European currency the state did not have all the tools it formerly had to control macroeconomic policy (devaluation of the currency and the setting of exchange rates), so the Government had to pay attention to the new environment in which it operated when considering its economic policies. Fiscal policy would have to be run in a ‘new way’, said the committee chairperson, Michael Ahern, in his introductory comments.

  Considering the fact that the single currency was launched on 1 January 2002, and had a long lead-in, it was a surprising statement. It was the equivalent of saying, half way up a high mountain, that in future when setting out on a hike the family would put on appropriate clothes and bring something to drink. Debate had taken place in the period before the euro on how economic policy would have to accommodate the new circumstances, but it had not been absorbed by Ahern or his Governments. When I asked Micheál Martin to what extent the loss of the interest rate mechanism featured in the Government’s consideration of fiscal policy, he was clear that the new currency was welcomed for providing low interest rates. That it required the introduction by the Government of fresh ways of dampening down economic activity when the economy was threatening to overheat appears not to have framed Government debate on fiscal policy.

  According to Laffan, an element of ‘soft Eurosceptism’ emerged in the first Ahern Government as the 1990s drew to a close. Laffan, who is regularly turned to as an expert on EU affairs, recalled a comment made to her at a party.

  It was a very casual comment. Someone said to me, ‘Ah, Brigid, Europe is over. You are going to have to find something else to do.’ It was someone senior in Fianna Fáil, not a politician. And I felt immediately that something was happening, that that person wouldn’t have said that to me if they weren’t operating in a milieu where that was being said. It was 1999. We’d had a great roar of the Tiger, very high growth rates, so obviously there was a sense of arrogance.

  At the time, she was with the Policy Institute in Trinity College and was working on a paper entitled ‘Organising for a Changing Europe? Irish Central Government and the European Union’. She went around the system interviewing senior politicians and civil servants. ‘I picked up on the fact that somehow or other Europe had gone down the hierarchy in terms of interest.’ The state had just come through some budgetary talks with the EU and secured that issue for the coming period. At the end of her paper she wrote that Ireland was in danger of losing its moorings on Europe. ‘And it did.’

  Reviewing the change in Ireland’s relati
onship with Europe, Laffan cited the row McCreevy had had with the European Commission and the European Council in early 2000 over budgets that the Europeans believed were unwise because they were pro-cyclical or were boosting rather than calming matters. Ireland’s economy was booming, but interest rates, because of the currency project, remained low. (Normally interest rates are raised to cool a booming economy and lowered to boost a flagging one. Euro-zone interest rates are set to suit the needs of the entire currency area.) McCreevy ‘put on the green shirt’, according to Laffan. This began a period when, for the first time, the Commission was portrayed in Ireland as other than its ‘best friend’.

  In a speech to the American Bar Association in the Law Library in Dublin in July 2000, Mary Harney said the relationship of the Irish people with the United States and the European Union was complex. ‘Geographically we are closer to Berlin than Boston. Spiritually we are probably a lot closer to Boston than Berlin.’ Ireland, she said, was a country that believed in economic liberalisation, the incentive power of low taxation. Ireland had sought to steer a course between the European and American outlooks but had ‘sailed closer to the American shore than the European one.’ She didn’t want key economic decisions being taken at the Brussels level. Ireland wanted regulation but not over-regulation. She repeated the views in a later article in the Irish Times, and the Boston v. Berlin idea entered popular debate on Ireland’s EU membership.

  In September 2000, in an address at Boston College, Massachusetts, the Minister for the Arts, Heritage, the Gaeltacht and the Islands, Síle de Valera, said she was frequently asked when abroad about the Celtic Tiger. A number of factors had helped create it, including ‘our ability to take advantage of our membership of the European Union.’ However, the development of the union in the period since Ireland joined had seen decisions other than economic ones being taken. ‘We have found that directives and regulations agreed in Brussels can often seriously impinge on our identity, culture and traditions. The bureaucracy of Brussels does not always respect the complexities and sensitivities of member-states.’ De Valera said she looked forward to a time when Ireland would ‘exercise a more vigilant, a more questioning attitude to the European Union.’ It was, according to Laffan, the most Euro-critical speech ever delivered by a serving Irish minister. She does not believe that such speeches would have been made when Ireland was receiving large budget transfers from Europe.