December 6, 2007

So what did Cowen do as the storms grew and we looked to him for courage? He bottled it

Posted in Irish Economy · 17 comments ·
Share 

IN 989 AD, Ethelred the Unready, the Anglo-Saxon King of England, introduced a deeply unpopular tax called Dangeld (Danish gold). These were coins that Ethelred minted from the tax.

Then, he waded into the Wash off the Norfolk coast and proceeded to throw the money into the sea.

This bizarre ritual was an effort to persuade the tides not to come in. If he could somehow bribe the sea, the impending Norse invasion might not happen. He would then live in peace and prosperity, safe from the ferocious Danish longships.

Ultimately, of course, the tides came in, the Vikings raped and pillaged, and the Anglo-Saxons were routed

Seeing the half-hearted stamp-duty efforts to stem the tide of falling house prices in yesterday’s Budget, I couldn’t get the image of bearded Brian Cowen, flowing mane dressed in only an Visigoth tunic held together by a few ornate broaches, pegging coins into the sea, out of my mind.

The stamp duty efforts will do nothing to prop up house prices; in fact, they might even precipitate further falls. The reason is that half-baked tinkering with tax rates risks what economists call the law of “unintended consequences”.

Think about the tax amnesty a few years back. There was a first amnesty, then a second, then another, then another and then another. So people held off coughing up initially, waiting for a more generous deal in the years ahead. And they were right to wait.

The same thing will happen with stamp duty. This column argued for the complete abolition of stamp duty as far back as May 2006. (Irish Independent May 10, 2006). This was almost a year before Mr McDowell hopped on that particular bandwagon. But the problem is you have to do things properly and with bravura conviction. Once you start doing things piece-meal, people realise that if they hold off, the tax might disappear altogether.

Buyers will therefore wait, prices will fall further and those who were about to take the plunge will step back. This might ironically accelerate the very house-price falls it was supposed to arrest!

This lack of conviction was evident throughout Mr Cowen’s Budget, which was unusual given that Brian Cowen was yesterday doing a leadership interview. This was his chance to show all of us that he had the mettle, the bottle and the long-term vision to lead the country.

He is, after all, the “anointed one”. We are moving out of the Bertie Ahern era of prevarication, “dig-outs” and endless tax revenue from a rising housing market. We are moving away from the era of spin, half-hearted initiatives and conciliation. Now, as things get difficult, it is time for the leaders to step forth. We want mettle, muscle and, above all, courage.

Yesterday, Mr Cowen went some of the way there, strode out manfully at first, then got cold feet, wobbled and ended up sounding like a poor man’s Eamon Ryan.

Far from committing too much money to public projects, (as much of the typically predictable commentary suggested this morning), he didn’t commit enough. He told us he was going to be ambitious, but he bottled it (against his political instincts).

Yesterday was the day to tell the cautious mandarins of the Department of Finance where to go. It was time to borrow heavily. This is particularly logical given his view that the housing recession will not spill over into the real economy in any worrying way. If that is the case, than now is the best time to borrow to fund desperately needed new infrastructure.

But either he believes that this view is wrong or hasn’t the courage of his own convictions. Yesterday was a priceless opportunity, but he wasn’t brave enough.

If we take a bit of altitude from the present cackle, the age-old law has always been that when the private sector begins to falter, the Government has to take up the slack. This is the lesson from economic history. Every time there is a downturn, the people look to the State for economic leadership. This was the time for Mr Cowen to unveil his New Deal, to take the reins and signal to everyone around him that he is in charge.

He needs to, because there is panic all around him. This week alone we have seen the former poster boys of the property boom, one after another, squeal that they needed government protection. These were the same people who this time last year, were titans of the inflated property market, astride their bubble, arguing that there was too much government influence in the economy. Now they are looking for protection, why? Because they are planking! The “land cabal” has been rumbled and their golden age of flogging second rate apartments at premium rate prices is over.

The State should not be beholden to them (they have done enough damage) but should seize the opportunity now to fix the infrastructural deficit. As the construction industry stalls, taxpayers will get a better deal in road building, railways and the like. For the first time in 10 years, there is an opportunity.

The chance presents itself precisely at a time when the need is most pressing. The World Economic Forum has just cited our embarrassingly hopeless public infrastructure as our biggest competitive hindrance. Mr Cowen should have announced far more ambitious plans for the next few years.

Why didn’t he? The only answer is that he believed the whispers of the mandarins. These senior civil servants –many of whom were badly scarred by the 1980s — have no vision. But worse than no vision, they are working off the wrong economic model.

In the bad old days, the Department of Finance was petrified of an ambitious politician who saw the need to borrow. Events followed a well trodden path where we borrowed too much — more than our domestic savings could finance — forcing us to borrow abroad. This borrowing put pressure on our (punt) exchange rate. Interest rates went up. As interest rates rose, personal borrowing fell.

This impacted negatively on government revenue, raising the prospect of yet more borrowing, putting the currency under more pressure. In the old model, borrowing begot more borrowing which begot successive crises. Now this financial chain has been broken. We have no currency and no domestic interest rate.

In EMU we can get away with it. In the same way as Irish consumers borrowed to spend like drunken sailors, the State now can borrow like a proper government to provide public infrastructure.

Instead of big bold moves, we get a Budget for everyone with no overall vision, no plan and no lasting impact.


  1. brian cowen

    I full agree David, my budget next year will replect your opinions.

    http://www.digoutday.com/

  2. martinomartino

    Jeez David, now I can’t get that image of Brian Cowen of my head. Except in my image ‘ornate’ transforms into ‘titanium-based power clasp’ before changing to the ole yellow muumuu with red polka dots.. What address should I forward the inevitable Viag. invoice to unintended side-affect of said imagery?

  3. Philip Murtagh

    Hilarios assessment of the bould Biffo by the sea.

    Still, am not sure if jacking up capital investment is a wise move. We simply do not have the project/programme management skills in the public service to absorb the extra cash. All that happens is the landowners get richer and so called advisors milk the system with poor delivery. Public service here could not manage a pee up in a brewery – they are CYA, legi-fearing unfirable administrators, not managers. They are like bunnies dazzled by bright lights when it comes to managing cash and delivery. We pay billions for a few kms of track we still cannot get right whereas Aussies pay a fraction of that for 1000s of kms across rougher terrain.

  4. Conor

    Right on the nail McWilliams – no vision!

    Every time a great opportunity comes along in this country we bottle it. There would be absolutely no harm in borrowing for capital investment in the country’s infrastructure, especially at a time when the brakes are being slammed on the construction sector. God knows, we need the roads and the telecoms infrastructure.

    It’s a dreadful pity that neither Fianna Fáil, nor our over-paid bureaucratic class (by the way, it wouldn’t do any harm to thin out their ranks a little) understand the difference between borrowing for investment purposes and borrowing to pay the dole as in the 1980s. This is our final chance to seize some small, lasting benefit from the boom years and help to engineer the conditions for a stable, prosperous future. We missed our chance to make hay while the sun shone; let’s at least do whatever we can while it’s setting.

    No! Our Taoiseach in-waiting would rather make political capital in the short-term by tinkering around with stamp-duty; when the unproductive property market would be best left to regulate itself! Infrastructure and long-term stability don’t grab the headlines and won’t make for a second term for Cowen in 2012; that is assuming this pathetic one-size fits all government stands the test of time. I hardly see the Greens being able to swallow the bitter pill of coalition compromise for much longer!

    In any case, it remains completely undesirable to continue to prop up our ailing property market with continued support. The reality is that property doesn’t produce anything, it doesn’t add to our national wealth, its capital is entirely unproductive. The money Cowen is trying to attract into the malodorous housing market would be better served sloshing around in tradeable services and manufacturing rather than as a scaffold for bloated bricks and mortar, which built on no foundations will soon come tumbling down upon us.

    Many of us have written on this site, pointing out the short-sightedness of Fianna Fáil policy regarding state-services and infrastructure over the last decade. Brian Cowen, I implore you to re-examine Budget 2008 and leave some legacy behind you; if not for the good of the state and the people you represent, then at least for your own selfish reputation. You have an opportunity to do something honourable – do it, lest you become known as ‘Bottler Cowen’ – just like our neighbour ‘Bottler Brown’ whose own lack of vision and government by focus-group is becoming increasingly apparent by the day.

  5. David said:
    “The State should not be beholden to them (the builders- they have done enough damage) but should seize the opportunity now to fix the infrastructural deficit.”

    The ould tradition of The Gathering in the Tent, at Ballybrit Racecourse and the Scatterin of Money ceremony (into the Fianna Fail fundraising coffers, by fat farmers, and speculators) may not be as ancient as the 989 AD story, David, but it is equally venerable.. Interfere with it at your peril!

  6. Besides the price negotiated by our hard headed politicians with the I.F.A.for agricultural land to build either railways or highways, is now so astronomical that they couldnt afford to build a new Boreen in Bantry no matter how much they borrowed.!

  7. nick

    I fear that the reluctance of a still pissed Ireland to drink that pint glass of Berrocca before it goes to bed will lead to a hangover in the morning.

    In the end of the day, perhaps the best medicine is just to let gravity and market laws do there thing in time. I don’t think Irish people are really hurting enough yet to realise that real change is required and is coming one way or the other….perhaps a falling property market coupled with some of the US corps leaving and a healthy dose of rising unemployment is necessary. Irish people like to optimistically delude themselves and remain naive so let’s just allow the forces of nature do there thing. This is nothing wrong with a bit of creative destruction every now and then…it cleanses the system….a bit like Berrocca !

  8. Paddy Hackett

    Paddy Hackett: Hi!

    David McWilliams: Far from committing too much money to public projects, (as
    much of the typically predictable commentary suggested this morning), he
    didn’t commit enough. He told us he was going to be ambitious, but he
    bottled it (against his political instincts).

    Yesterday was the day to tell the cautious mandarins of the Department of
    Finance where to go. It was time to borrow heavily. This is particularly
    logical given his view that the housing recession will not spill over into
    the real economy in any worrying way. If that is the case, than now is the
    best time to borrow to fund desperately needed new infrastructure…

    Paddy Hackett: David has repeatedly made claims that the national
    economy of the Irish Republic will suffer a hard landing yet he appears to
    be ironically claiming in this current piece of his that the choices made by
    the Minister for Finance can make a difference to the future state of the
    economy –hard or soft landing.

    It is questionable as to whether the Government should have taken up the
    slack, as David would have it, by borrowing money on a significantly larger
    scale to pour into the economy for capital projects. At the moment it is not
    clear as to what the condition of the world economy is. Furthermore even if
    this were clear the world economy (including here the Irish economy) may
    not have progressed along its cycle sufficiently to render appropriate a very
    large injection of funds into the national economy. Timing is of the utmost
    importance here. If the economic downturn is far from bottoming out then a
    mega injection of capital may not create the conditions for recovery.Then
    too there are the constraints that the European Commission may impose
    on the small Irish economy.

    Generally it is just not clear as to what is the current condition of the
    world economy particularly its more powerful components (the US). How then
    can it be said what kind of interventionism is appropriate by the Irish
    state? Given the uncertainities prevailing the present budget was probably
    the best action the Irish bourgeois state could take as a means of coping
    with the current economic contraction.

    If it was a matter of throwing copious volumes of money at the problem of
    economic downturns, recessions and depressions then it would follow
    that they need never, in effect, exist anywhere in the capitalist world. But
    this cannot be since the nature of economic downturn has a deeper and
    more complex cause located in the contradictory nature of the valorisation
    process itself.

    Overall the coalition government has probably done, budgetwise, as best
    a job as they could concerning the immediate present in expressing the
    interests of the capitalist class and capitalism itself.

    Paddy Hackett

  9. Paul Hughes

    Brilliant David, just brilliant. An antidote for the amount of unrealistic rubbish we here in so many sections of the mainstream media.

  10. Joe H.

    What I´ve always wondered is when and how were lending standards unwound?

    I can remember being refused a mortgage … being told sorry we can only lend you 3 times your salary. (I had inquired if i could buy the house next door and rent it.)

    When did it become OK to walk in and say “I want to buy a house, what lie do I need to ttell? .. without being told that you will need to first have 10 to 20 percent of the price saved as a deposit.

    Was their a secret meeting somewhere of power elites in an underground lair … errr probably not.

    Herb Greenberg is on the same subject here http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/

  11. Re Joe,H,
    I was helping (financially) one of my family to buy a house some 8 years ago-like so many parents have done in recent times-and although he was only earning buttons, we went with him to the building society and the kind manager told us that as we were going as guarantors, he could pretty much put what he liked on the application form (there was not going to be any rigorous checking of his “details”)
    This was , a branch of one of the largest building societies in Ireland.
    After that they brought in the lifetime (40 year) mortgages, and also the “interest only for ten years” mortgage.
    I remember when the english banks did the same, some 35 years ago before the biggest property crash in the history on that Island.
    The british banks also lent money on the strength of two incomes on the proviso that the female partner signed an agreement that she would not bear children,and risk losing her job and jeopardise the repayments.
    (Irresponsible parents are punished in China too, to this day..)
    The irish banks forgot about that last mentioned ploy.The rest was history repeated, with a wink and a nod (lots of them) throw in for good measure.!
    Let the tears commence.
    As for borrowing our way out of recession, shure it would all go into the pockets of Bertie´s supporters (on the next benchmark round!)

  12. Declan

    In response to Paddy, I don’t get your point! It is totally irrelevant how the global market is performing when deceiding to invest in our own economy. You could use the analogy of a factor experiencing down time, what better time to invest in improving efficiencies and infrastructure when things are slow than trying to do it when times are busy.
    If we are looking into a period of slower growth, now is the time for creative thinking by the govenment. The budget showed that Cowan does not have the capacity to be a leader. He lacks vision and ability, the only vision that is emerging from the Government at the moment in time is from the Green corner.
    Maybe FF should look to the Greens for some clever initiatives.
    I believe that the Green image of Ireland is not exploited to the full!

  13. Donal

    Biffo doesn’t inspire me to have confidence

    Let the Credit Crunch Begin!

  14. Paddy Hackett

    Declan: In response to Paddy, I don’t get your point!

    It is totally irrelevant how the global market is performing when deceiding

    to invest in our own economy.

    Paddy: You misrepresent me. I never said anything concerning the global

    market.

    You remark that if “we are looking into a period of slower growth, now is the

    time for creative thinking by the government.” The above is just

    meaningless.You never indicate what you mean by “creative thinking”.

    I am not a defender of Cowan’s politics and policies. However your reference

    to him in your posting amounts to no more than mere unsupported assertion.

    Paddy Hackett

  15. I wonder if Bertie and Cowan knew that the construction industry was grinding to a halt last April when he announced his long list of election promises.
    Great crack to listen to it all again-if you dare..It has been taken off the RTE podcast archives since Vincent Browne was made redundant (payback time ?) We have an audio (poor quality) copy of the original and best auction political speech of the century.!
    http://youtube.com/watch?v=Xsegw04LTAE

  16. [...] Content: So what did Cowen do as the storms grew and we looked to him for courage? He bottled it How breakfast roll man won the election var addthis_pub = ‘rbquirke’; Rate: (No Ratings Yet) [...]

You must log in to post a comment.
× Hide comments