Could it happen again? This is the thought that went through my head, as I waited for the first question from the panel at the banking inquiry last Thursday morning. During the previous few weeks, I spent lots of late nights going through articles, books and documentary evidence written since 2000 on how an economic catastrophe builds. It’s funny how things seem so obvious in hindsight, but back then it was not clear to that many people.
In the inquiry, I likened the narrative of economic and financial meltdown in Ireland to a forest fire which starts with a few matches and ends with an inferno engulfing the entire economy. This fire, if it is allowed take hold, will destroy everything around it and therefore has to be put out with force, otherwise it will incinerate the entire economy.
This analogy came to me years ago, sitting in a Croatian café talking to a local fireman as he explained to me what can happen when a fire is allowed catch.
The pyromaniacs who start the fire are the bankers (and all others who cheer-led the credit splurge, you know who you are). Credit is the lighter fuel igniting the economic inferno. Human nature is the wind that whips up the flames because everything I do affects everything you do. You are forced onto the property ladder, not by yourself, but by me. When I buy, prices rise, this forces you to bring forward your house purchase because you don’t want to get left behind. So all our actions affect each other.
Now that we are armed with the experience of 2000-2008, could this possibly happen again?
My answer is unfortunately yes, unambiguously yes. The reason is that human nature is a funny old thing. We never learn. Never. Credit cycles are as old as the Bible. Read Leviticus and Deuteronomy and you’ll find the biblical equivalent of Anglo.
We always think this time it’s different; that’s just the way we are.
This consideration of the nature of humanity came to me when I was testifying at the banking inquiry. In the end, the question was whether it could happen again. It could because the way banks, credit and property work in Ireland is that banks will always want to lend, so prices will always have upward pressure and, as prices go up (as is happening now in Dublin) people will always look at the last rise in prices and think, they had better get in before they get left behind.
At the moment, the last monthly increase in house prices amplifies the amount of credit extended for lending next month. If the house price goes up, the banks will feel they can lend more because the house is the collateral and that collateral has gone up in value. Therefore, there is always inbuilt inflation in the system.
Imagine a mechanism where the latest increase in house prices doesn’t increase the amount of money that could be lend out but decreases the credit available. This could be self-regulating and would work as the watchman without having to depend on human frailty