The ‘Autumn of discontent’ for Ireland that was set in stone by the Irish Government’s failure to appreciate the depth of its fiscal crisis in 2007-2008 has arrived. It is, though, never too late to take the sort of action that is required, and which, still, can lead the country to stability and recovery. However, there are two issues that the Government must now hold its nerve on, and hold its nerve in the face of a chorus of unwise counsel from (mostly) journalistic commentators.

The most seriously fallible, because of where it came from, was the advice of the Financial Times on September 12th that the Irish Government should default on its bonds. Whatever about the past advisability of nationalising Anglo Irish, (something, in retrospect, that most backward looking commentators, including the present writer, would agree on) the fact is that, now, Anglo Irish bonds are Irish Government bonds. A default on these bonds is a default on the Republic of Ireland as a sovereign entity – to do so would represent an end of the record of credit worthiness of an Irish Government unbroken since the foundation of the country, when Brian Lenihan’s predecessor, Michael Collins, and Eamon de Valera financed the nascent state in 1919.

More to the point, it would be a breaking of the word of the Irish Government. So much for, ‘my word is my bond’; so much for its integrity.

Another worrying aspect is the widespread, almost casual, acceptance of the consequences of this course of action amongst more than a few of these journalistic commentators, and the fact that the costs of default can be so blithely dismissed. As we have written many times here, the main sovereign risk problem lies, in any case, not with the cost of recapitalising the domestic banking system, it lies in the failure to reduce Irish public expenditure (capital and current) to the levels that the economy can afford, and to levels which the international bond markets are comfortable with.

The other issue that the Government must hold its nerve on is the urge to over-regulate our financial services industry, including the international financial services industry, another national asset, akin to the credit rating.
There is a real and present danger that Ireland’s policy choices on both the economy and the future of its financial sector and financial services industry (a jewel in the crown of the Irish economy, and, in the case of the former, a potential jewel in the crown) will mean a lost opportunity, and, worse, a real loss of productive capacity in the economy.

The lack of appreciation of Irish national assets such as its sovereign credit standing, or the reputation and operational effectiveness of its international financial services industry, is reflected in demands to regulate the financial services industry and the banking sector into the ground.

The mantra arising from this is well familiar and that the pressures are telling on some of our public servants is clear. The new head of banking regulation in Ireland Jonathan McMahon opined in a paper this summer that finance was ‘a public good’, a view that has been put forward in the context of debates about the financial crisis. He is not alone. The Financial Regulator itself states in its CP41 Consultation Paper “it is now widely recognised that one of the causes of the international financial crisis was inadequate oversight of credit institutions and insurance companies”.

This is all spin. There is always an element of truth in spin, but spin works by leaving out a crucial element in the analysis, elements that often, and in this case, invalidate the conclusion.

It is worth looking closer at the two examples of spin mentioned – contained in the Jonathan McMahon paper and the Regulator’s CP41.

The recently coined international view that finance is ‘a public good’ results from a confused attempt to get to grips with the causes of the credit crisis, resulting in a miscomprehending conclusion that something has changed in that Governments have had to rescue the global financial system, leading, ergo, to the conclusion that ‘finance is a public good’.

The public good involved here is actually money not ‘finance’. In this, nothing has changed. The public sector invented money – when, about 700 years BC, kings in Asia minor invented a new tool that facilitated people to exchange goods, and, benchmark the credit they exchanged as well. Ireland came into the game in 997 AD when King Sitric minted the first coins in Dublin.

Fast forward to 1999. The world entered the new millennium with, possibly, for the first time in history, (or so we thought) inflation defeated. The price of gold stood at $300, down 25 p.c. on the $400 of 1990. What was missed by Central Bankers (and everyone else) was that the growth of an innovative new form of money (credit derivatives) represented an effective expansion of the money supply.

As always in history, kings, or, in this case, presidents, lie at the root of the beginnings of the problem, when bad money entered the system, in the form of US sub prime mortgages, mislabelled as prime, with the global consequences that we are now familiar with.

That therefore needed to be included in the purview of Central Bankers whose primary and proper concern should have been the protection of the stability and integrity of the currency, as it had been since Paul Volcker, for the first time, got on top of the problem in the early 1980s, not, actually, with ‘light touch’ regulation, (to use another recently coined misnomer), but with the most rigorous and effective implementation and enforcement of monetary policy seen in generations.

It therefore would be more accurate to say that the cause of the global (and Irish) credit crisis was inadequate control and oversight of money supply, and monetary policy by the responsible regulators (the main Central Banks of the world, of which the Irish Central Bank was an integral and integrated part, organisationally), starting in the 1990s, but accelerating, with further inappropriate easing, as it happened, in the months and years following
9/11 2001.

It follows that the looser (CP41) formulation of the problem ‘that one of the causes of the international financial crisis was inadequate oversight of credit institutions and insurance companies’ leads nowhere in particular, and leads potentially in a direction of sanctioning useless and meddlesome engagement by bureaucrats in the business of banking and insurance, when all that is, and will be needed is the proper and effective conduct of a modernised monetary policy that gets to grips with the new and innovative forms of money that an innovative world has devised.

In practical terms, what the Regulator and the Government should do with CP41 is to harmonise its useful suggestions, (and the useful suggestions/amendments of the many companies and individuals who have submitted responses to it) with the body of international work forthcoming internationally from bodies such as the G20, the BIS, the Bank of England, and the EU Commission to ensure, above all, that Ireland does not ‘gold plate’ international requirements to its competitive detriment, and yet emerges with a financial services regulation regime that is of the highest quality.