THE BANKING crisis could have been avoided and the recession would have been much shallower if a number of simple regulatory measures had been put in place in 2003, according to a paper presented to the Dublin Economics Workshop in Kenmare last night.
However, the authors controversially claim that the economy in 2010 would now be the same size as it is even if the banking system had been better regulated. This is because without high levels of bank lending, economic growth in the 2003-07 period would have been “substantially lower”.
The findings of Prof Gregory Connor of NUI Maynooth and Prof Brian O’Kelly of Dublin City University are in sharp contrast with those of Prof Patrick Honohan, governor of the Central Bank.
He carried out a similar exercise in his report on the banking crisis earlier this year and found the economy, as measured by gross domestic product (GDP), would be considerably larger if the banking boom and bust had not occurred.
Less controversially, the joint authors said “a few simple regulatory policy rules, well established internationally at the time of the Irish bubble, would have led to a much more stable Irish banking sector in 2007”.
These rules would have included restrictions on banks’ property development lending and their net foreign borrowings. Both should have been subject to upper limits relative to the size of banks’ domestic deposits.
Prof Connor described these foreign borrowings as “hot money suitable only for short periods or small proportions”. He dismissed the view that the banking crisis in Ireland and the State’s deep recession were a result of international developments. “Lax financial regulation was the pivotal Irish policy error leading to the Irish banking crisis,” he told the conference.
“The US subprime fiasco and 2008 global credit freeze would have hurt Irish economic outcomes, but not disastrously.”
He told the conference “other policy errors, such as in land use planning, tax incentives, fiscal expansion, regional policy” were “second order or derivative of this policy error”. The “risky and unsustainable inflow of foreign capital mediated by the domestic banks” fuelled economic growth in the period after 2003.
Without these inflows, the cumulative expansion of the economy in the 2003-2007 period would have been much lower. This lower economic growth in the recession period, combined with a much shallower recession in the period after 2007, would have resulted in the Irish economy, as measured by GDP, being the same size in 2010 as it actually is.
However, the social costs of the highly volatile nature of Ireland’s growth path over the past decade have been “enormous”.
