May 11, 2008

Lenihan faces perfect storm

Posted in Irish Economy · 25 comments ·
Share 

The new finance minister should remove all support from the bloated property sector.

The Minister for Finance of a small country which is facing difficult times is like the captain of a small boat sailing into choppy waters. Imagine for a moment that you are in a boat coming around Omey Island. In a blaze of May bank holiday sunlight, Connemara opens up before you.

Looking past the Sky Road, double-spired Clifden and beyond to the Maumturks, it is hard to image a more beautiful and peaceful place. That is, of course, until the Atlantic weather turns. If you have ever been caught in a small boat when the seas change, when summer turns to winter in a matter of minutes, when the winds pick up, the ocean swells and the power of nature envelopes you, you will realise these are forces to be reckoned with.

Forces building in the global economy – the credit crunch, the global property slowdown and globalisation in every aspect of manufacturing and services – are converging and affecting Ireland in much the same way. The restructuring of the Diageo operations in Ireland, announced on Friday, demonstrates the fact that nothing, even the most sacred of things, is permanent.

Thirty years ago, when Ireland was isolated, we could ignore international economic turbulence. Then we were spectators, but now we are players.

Today — when we can borrow where we like, buy houses where the sun shines, employ Polish plumbers and waitresses, reinvent ourselves on myspace.com, travel for half nothing, watch news as it breaks, log on, blog on, buy stuff from China, get instructions for our laptops made in Limerick from helplines in India, read what we like and see what we like – we are fused with the rest of the globe.

In the book A Perfect Storm, Sebastian Junger described a storm that hit Nova Scotia during Halloween,1991. A perfect storm occurs when several weather fronts, which individually would be bad enough, converge to wreak havoc.

The weather fronts build far out to sea, gaining momentum, heading for the coast. Their simultaneous convergence causes the forces of nature to whip up a most violent tempest. This occurs rarely; when it does, the results are devastating.

As the captain can do little about the weather, his job is to make sure his small boat is seaworthy. Unfortunately, Captain Lenihan has inherited a vessel formerly skippered by Captain Cowen, who failed to keep it shipshape, even when conditions were near perfect.

Now Ireland has to change course. The country will thrive if we wean ourselves quickly off the property monster that got us into this mess in the first place. We have to do this for both economic and psychological reasons.

While other small trading countries like Denmark, Singapore, Israel, Finland and Hong Kong are thriving despite the changed conditions, we are still weighed down by the anvil of property.

The most far-sighted move Captain Lenihan could make would be to take away all government incentives to invest in property and allow the price of this most overrated asset to fall rapidly. This has to be done in order for us to remain internationally competitive.

Think about this statistic: the average cost of a middle class house in Ireland is nine times that of the equivalent house in Texas. Texas is the home of Dell and we as an economy, are trying to compete with the likes of Texas. It is obvious that, far from making us strong, the continuing high – though falling – price of property is a problem.

If the new minister were to take away all state support for this bloated industry, we would slowly move in the right direction. This would mean that all tax breaks for apartments, for redevelopment, for first-time buyers and for private pensions invested in property would be frozen and the construction industry treated like any other sector.

Such a move would have obvious revenue implications, because the construction industry throws off huge revenue for the state coffers and activity, already slowing, would falter further. For example, about 28 per cent of the price of every new home goes to the state in tax.

We have already seen how the slump in stamp duty has affected the coffers. But long-term, no country ever got rich by its people buying and selling property to each other with money borrowed from foreigners.

Psychologically, the state should try to unravel the mindset which has emerged with the property boom. This mindset is that the easiest money to make is quick, speculative money. Go to any pub in Ireland and you’ll still hear stories of the fast buck and the respect that is given to the lad who turned to property in the good old days. To move onto a more productive economic level, we need to give people back the notion that decent hard work – rather than smart-arsed or greedy speculation – is a valuable and worthy pursuit.

Such a mindset shift would allow us to conceive a new economic strategy. This would involve building a proper, lightweight, exporting economy in Ireland. Where possible, the incentives for direct foreign investment must be kept in place and complemented with incentives for Irish people to take risks unrelated to property.

In concrete terms, investors who back start-up companies should be given generous and long-lasting favourable tax treatment. The state, as it does in many other countries, could also reduce start-up costs by subsidising office space for incubation centres.

Ireland has so much to offer risk takers – both our own and international – in terms of raw material. For example, Science Foundation Ireland is slated to invest €7 billion in scientific research over the next ten years. This will go to waste unless we also bring in the necessary commercial skills that can harness this research and build it into something that will be for sale. The idea should be to build companies of our own rather than just being a conveyor belt of talent for the multinationals.

Israel – a contentious country which is celebrating an unlikely 60th birthday this week – has done this. It has created, through the extensive use of incentivised US venture capitalists, a proper high tech industry.

We could do something similar, but so too could everyone else, so we have to be quick. It will be interesting to see what the new boss at the Department of Enterprise, Trade and Employment, Tánaiste Mary Coughlan, might come up with.

As we sail into the storm, we have options but we must make the hard choices. Cowen talks about patriotism; the most patriotic thing he and his new team could do would be to think of the nation as a whole rather than pander to the vested interests that have hijacked debate and policy in the past.

The property boom and the associated feel-good factor masked this takeover, but as Warren Buffett magnificently commented, it’s only when the tide is going out that you see who’s swimming naked.

Further Reading:
The Perfect Storm: A True Story of Men Against the Sea (Stranger Than…)


  1. dermo

    Your spot on in what your saying David,put there is one big problem.Have a good look at the Ministers we have,there is probably one or two that have business experience the rest are ex-teachers and civil servants.Who have never ran any type of business only lived of the state coffers.Cowen and Lenihan should ask the top 20 business people in Ireland, to sit around a table , ask their advice on how to get this country moving again.Instead of depending on vested interest civil servants who hav’nt a clue.

  2. Garry

    Have to agree even if as a property owner it would affect me.

    Back to basics, support startups and exporters and give breaks to invest in them. It shouldn’t matter that much if the exports are “trendy/high tech” or not, it’s all about about bringing in the money, whether its food/drink products, biotech, software, services … whatever

  3. brian

    Bet you couldn’t go a month without writing a column that refers to that Warren Buffett quote

  4. Johnny Dunne

    David, the ‘analysis’ filtering through about the economy is ‘masking’ the extent of the problem, unfortunately the mindset change required may not happen for a while ?

    The ‘new’ Government needs to call it ‘as it is’ and not hide behind statistics which sound good but mean nothing! For example the IDA plan to support ‘just’ 360 projects between 2007 and 2009, they supported 115 project in 2007 but less than 30 projects were from companies not located in Ireland already. Enterprise Ireland hope to support 200 start ups in the same timeframe. That’s not even 100 ‘new projects’ a year, compare this to the amount of property developments being built !!

    The opportunity in this ‘storm’ is to attract 100’s if not 1,000’s of companies to set up operations in a ‘safe haven’ — Ireland – we have the infrastructure – offices, people etc. If Minister Lenihan had a new ‘fiscal’ policy as aggressive as the construction industry tax reliefs then we may have a chance ? Is there the political ambition / need to make the visionary ‘bets’ on a sustainable future for Irish industry? Tanaiste Coughlan should know from Agriculture what can be the impact of losing control !

  5. Ted

    David – I couldn’t agree more with what you have above.

    But we all must realise that Brian Lenihan’s only job is to manage the finances so Fine Fail get elected next time round – whether the ecomony improves in this period would only be a by-product.

  6. Look what the cat dragged in

    Thats all well and good David to state that we need to re-direct our efforts from property to start-ups – particularly if its in the high tech industry. I agree with you 100%. We’re crippled with massive debt for property (myself included) But can you see Cowen as the legendary leader for the job? All the leaders in the Dail, both those at Cabinet and others, neither have the vision, drive, intellect or balls to do so. Imagine how disgruntled the builders at the Galway Races would be if the country turned it’s back on builders

  7. Stephen Kenny

    It seems unlikely to me that this sort of government directed change of direction is possible. As Ted implies, look at it from the politician’s point of view:
    If they kick off change, it’s going to hurt a lot of people, and they, the government, will be very clearly responsible. It might be for the common good, but the generall population will simply see it as the government making a terrible mess. Roling out the ‘Export Enterprise Initiative’ argument would be seen as a feeble excuse. Then the trouble hits, and everything gets worse. Trying then to blame the ‘global economy’ sounds pathetic.
    Much the best just to sit there, blithley keeping everyone happy, and then blaming the global credit crunch for any problems that occur. Once the problems have really hit, and everyone is in real trouble, it is then possible to trumpet “Change”, and not be blamed for the trouble.
    (In my view this political situation is also the reason that we’re in for a good old bout of inflation)

    It would take a politician of real chrisma and iintellect, and an, even faintly, initelligent media, to get the (much better) alternative to happen. I don’t remember when I last saw either.

  8. Johnny Dunne

    Sounds right Ted and Stephen, it seem politicians act with re-election considerations in mind rather than the longer term interests of the general population. After the unprecendented growth in employment ‘pumped’ by borrowings if we don’t get a wide base of exporting companies established and/or trading through Ireland asap, they’ll probably get blamed anyway and kicked out ! Isn’t trying to solve our our economic problems now more important than any one politician/party – unless there is another way of turning the downward trend ?

  9. b

    Sounds like we took our economic policy from the Chief Deckchair Re-arranger from the Titanic.

  10. Malcolm McClure

    David’s piece and the accompanying comments illustrate something I find disturbing about popular economic analysis. To make the subject seem interesting, there is a tendency to reach for the overwrought nautical metaphor. A perfect storm. Tide going out. Deckchairs on the Titanic. Sink or swim.etc.
    These comments are not helpful to Lenihan, whose job is to reinforce confidence in fiscal stability, underwritten by the residual strength of the European economy. Trouble is, these comments can become (for a time) a self-fulfilling prophesy and just deepen negative feelings already present.
    Give the man his 100 days and let’s see how bad things really are.

  11. Trex

    Nice article , but i find it too fanciful for ireland with the current climate for investment in this country and the attitude of the new generation towards working in general . This generation is ruined by the idea of getting rich quick through property schemes and they do not value anything else . education is not a priority for them , god forbid studying subjects like science ,maths and engineering. Governments push towards creating a knowledge economy will not fly at all , considering the fact that there are not enough graduates in these areas in this country ,(not to mention 25% illiteracy rate unbelievable stuff!!) so we still need foreigners to do this work , so why would you invest in the ultra expensive ireland instead of india or singapore. yes low tax , grants etc could be attractive if you do not have massive gaps in cost of doing business between ireland and other countries competing for these kinds of investments. Unfortunately ireland shot itself in the foot , by a false property boom and greed , getting everybody in massive debt , creating wage pressures in every sector and rampant inflation in return. I interview many young graduates every week , all they are interested is the salary , no enthusiasm about the work at all , if a new business grad asking for 50k starting salary with no experience what so ever , this country has a very long way to go down before it goes up again.

  12. Stephen Kenny

    Johnny and others, I’m not sure it’s necessarily fair to blame the politicians, totally. The problem is really wider. You can break a country up into bits, for the sake of this argument, and note that all the bits interact, are fed from, and feed, each other.
    Many argue that we are getting towards the end of a 25 year financial services driven boom.
    It would take a politician of exceptional talents, supported by a media that really understood and supported the goals, for anything to happen. Our media is populated by Gen X and Gen Y, who are absolutely the last people we should be looking to to get this. You might just as easily blame ‘youth culture’ for the problem.
    What is good for the society, and economy, at large, is not necessarily good for the individual (Economics 101 – The small town businessman and his factory). Unfortunately, we are also obsessed with the individual. How long ago was it that we were arguing that a lack of ‘Access to capital’ was something that had held back most people, dividing us into the Haves and Have-nots? What no one argued, possibly because bank managers like Captain Mainwaring are extinct, was that capital is an item that needs skill, and probably experiance, to handle properly, and make the best use of.
    So who’s “fault” is it? I suppose it depends on how you view the various groups. My own view of politicians is that they are, with very few exceptions, little more than a bunch of faintly dishonest, smarmy freeloaders, riding the wave of technical innovation, and claiming credit for the benefits that we get from it. But I have to remind myself that we vote for them, and that the media lives in the comfortable, rather brainless, ‘least worst option’ world, and that we buy their products.
    I always come back to the question: Why do the Germans so rarely seem to have these problems? My answer: The Germans are grown-ups, if it looks too good to be true, then it is.

  13. The-Original-Ed

    David, you’ve really crystallized our present situation in this article – as you point out , we as a people have ability in abundance, but unfortunately, no real leadership. Mr Cowen, for all his rhetoric on patriotism and working together, is possible one of the most divisive people among us – his record is abysmal. We’re in for a long period of distraction after distraction and “get out clauses” day after day. Until, we get a system of government where talented people with experience of the real world can be appointed to Cabinet, we’re not going to go too far. This practice of empty rhetoric and playing with stats. day after day is well past its sell by date and has no value in a modern society – everybody knows what they want and it’s now a question of delivery – mythology doesn’t cut much ice anymore.
    The Lisbon outcome will be interesting – I for one will be against it – more and more bureaucracy heaped on business – a world where the size of a label is more important than what it denotes.

  14. sinead kelly

    There are too many vested interests in the property market as this is where the govt gets the revenue to pay for its crazy spending plans.Even Mc Sharry was unable to keep govt spending down and passed the baton to Prince Albert who was utterly hopeless.The big mistake was allowing an unlimited number of people emigrate to a country with the most expensive housing in the world, the result more people out of work and crucifying rents.Expect emigration to Australia from Ireland to number 40,000 per annum within 2 years.The rest of the English speaking world is full.G’day Sheila/Bruce.

  15. Philip

    Stephen, Germans and most other European countries are grown up because they had it hard in living memory back in the 50s. They also have had the Science and Tech institutions in place for centuries. Remember too that their route to their sucess has been torturous and socially disruptive and damaging.

    Let’s put the question this way…can Ireland get to the the level of what is considered a good operational economy which does a decent servicing of the country’s needs with as little social harm as possible. My belief is that it is possible and I think the mindset is right and is also about ot be tested.

    Let’s be careful about doing ourselves down too much. We are a nation going thro’ a growing up phase. If this was about the UK, you could say that modern manufacturing methods never took off as quickly as other parts of the world becasue it was mired in a traditional Victorian mindset – even though the inventors of the new techniques were from the UK. Whinge whinge etc. You should listen to a German complaining about the cockups in their country…the lack of flexibility, opportunity and poor mobility between jobs which traps people in specialists traps and starves industry of resources -this is a real problem there.

    I agree totally with David in this article – but for one thing – lets be careful how we do it. If we are too quick, the instability may not be worth it and when we do get there eventually, a well run operation is always competitive. There will be cockups if we move too fast. Let’s hope the politicians remain steady.

  16. Stephen Kenny

    Phillip

    You may be right, and of course I hope you are!

    I think I would say that ALL European countries, except possibly Switzerland, had it very hard for much of the 20th century – it wasn’t limited to the central European area – so I’m not sure I’d go aklong with that reasonsing. And the reasoning matters, as it may be a guide for how to, or not to, plan the right path. We can look at the post war centrally planned economies, the liberal economies, the flirtation with a highly socialised economies in the 70s, and so on.

    The difficulty with change is that it generally takes a situation where either everyone realises the benefits of working towards and ‘common good’ – a sort of social ‘tough love’ (after a war, for example. In fact, it’s probably the only example), or they have nothing, or little, to lose, and almost anything is better than the situation they are in.

    Perhaps I’m too pessamistic, but my reading of history is: When there are the time and resouces to plot a new course, there is not the will; When there is the will, there are neither the time nor the resouces (with the exception, possibly, of a post war period, or something similar).

    In saying that, we’ve had a lot of change in the past 25 years, so perhaps change driven by a popular model IS possible. Just think of the women’s movement, for example. Can we imagine a popular movement to change economic direction, with all the social, economic, and status, changes that go with it?

  17. MK

    Hi again David,

    I agree with you. The property incentives should have been removed as the property bubble expanded ie: on the way up. They can be added back in during weaker economic times to spur growth ie: on the way down. In this way, a ‘soft landing’ could be assisted through Government action and selected incentives. Instead, the government added their air to the bubble by keeping the incentives. Incentives in this case include mortgage interest tax relief, which the OECD recently commented on (I think).

    > The state, as it does in many other countries, could also reduce start-up costs by subsidising office space for incubation centres.

    I wrote to the Minister of Industry (Mary Harney at the time) and got a wishy-washy response back saying that it was against EU rules, etc, etc. Clearly, they are not even trying as there are ways to do this. The current situation is that the government is spending millions on building so-called incubation centres (located at Uni’s and IT’s) which are then available to rent but only at market rates. ie: no real benefit to the start-up at all, and the intangible benefits (co-location to other start-ups) are minor if measurable at all. I know as I have been in several!

    Yes, the SFI ‘investment’ is actually providing academic careers/postings mainly for foreigners who then mostly all leave Ireland. The research produces little commercial spin-offs. It is a crazy waste. However, the academics know this already, as do the business people in Ireland. No-one believes the soundbites that emanate from the politicians. ‘Marrying’ the business/commercial world to the academic parallel universe is difficult, but not impossible. This country the linkage is pathetic.

    As has been pointed out, dont expect the polticians or the new ‘bench’ to make much of a difference. I do believe that every team though deserves a chance, but its not as if this team is brand new as many already were just in different positions on the ‘table’. Moving the deck-chairs on the titanic comes to mind (feel free to use that the next time you are on Q&A). Ireland will have to wait for a real new government if it wants to see a step-change in policy and a tangible effect.

    MK

  18. Johnny Dunne

    Agreed Stephen, it’s not just the fault of politicians as they often are provided with information for ‘interest groups’ and gov depts to make policy decisions based on vested interests and the status quo. The ‘establishment’ are afraid to say it as it is and ‘young people’ don’t have a representative voice as most of the politicial parties are lead by a generation who don’t ‘understand’ international business.

    For example, MK’s point about getting feedback from the Department of Enterprise that the EU won’t let the ‘state’ fund small businesses by giving ‘free’ or subidied office space is the way it is as EU members state aid is focused on R&D not operations or sales/marketing.

    Bottom line, already Ireland is not ‘allowed’ have a competitive advantage over other EU members on how it supports industry ! Our political leaders need to be shown the ‘truth’ and then have the belief to ‘push’ changes so Ireland is the best place to do business. If not, we will be good citizens of Europe, a ‘nice’ place to visit with no control on the economic levers to promote viable industries….

  19. shtove

    Perfect Storm is a great book.

    Brian Lenihan was not a great barrister – sometimes hopelessly off course, and a bit of a blusterer. Bit like McDowell, but without the arrogance. Watch out for gale force winds blowing from his mouth, or more southerly parts of the anatomy.

    Seriously, why should someone like that be appointed minister for finance? His only qualification is that he has a solid constituency gifted to him by a political dynasty.

    Ireland needs a Vince Cable to call out the bullshit of the financial establishment.

  20. VincentH

    At first I thought you were doing a Hemingway, but then you changed to Conrad. Either way, a 30% drop in prices seems a reasonable amount. That is the bet that most in the UK are working under.
    Mind you on the Omey Island issue, it would depend on the size of your transport. If you are big enough, turn into the sea. While a shallow draft, inside the Island, might be a way to go.

  21. Rob

    I don’t really think we have politics in this country. We still have the two largest parties, both in the centre, based on whether you were a Collins/De Valera man. I cringe every time I hear most of our politicians speak, the level of debate and the mindset are completely out of touch with reality. Think about it, the level of pay rise awarded to politicians was recently the same as the actual industrial wage, circa 38,000. It is nonsense. How can politicians call for wage restraint (which actually may be necessary due to rising costs etc) when they show no restraint themselves. Leadership comes from the top down. If anything Cowen needed to trim his cabinet back down instead of keeping the ridiculous 20 junior Ministers of State.

    The mindset in Ireland, perhaps one of frugality or moderation needs to take hold. If we are honest about it, we are an immature society, i.e. when money came our way we lost the run of ourselves completely. A more European/Scandanavian approach towards integrated public transport, adoption of greener policies, tackling Govt waste etc. needs to take hold.
    In some ways if Ireland gets an economic shock, and perhaps this is already underway, we created the crisis ourselves. As someone said earlier when we had the resources we didn’t actually have the will to change. The best piece of public infrastructure during the Celtic Tiger was the re-opening of the Harcourt Street train line, closed 50 years earlier!

    Bertie Ahern’s gifts were as a fixer and a deal-broker, perfect for solving the Northern situation but actually useless in setting forth a vision and making hard decisions along the way. The reason why he fell out with no-one is that he hardly took a decision and when somebody stood up to complain to him in the Dáil, he agreed with them! Bertie’s vision got as far as everyone getting wealthy on the property ladder. This is fundamentally nonsense as is now appearing. Does anybody who supports Fianna Fáil now not realise that the cosying up to developers in the Fianna Fáil tent in Ballybrit has resulted in millions being made for a few developers while thousand of young couples have ended up in overpriced shacks, miles from anywhere with no decent infrastructure/facilities. This is not freedom nor is it ‘republican’ it is slavery dressed up in the fom of a big loan. It really is wake-up time for muintir na tíre seo.

  22. How do the best frame an investment decision? I think you might like my new self-published book. My book, “The Four Filters Invention of Warren Buffett and Charlie Munger” examines each of the basic steps they perform in framing and making an investment decision.

    Warren Buffett mentions the Four Filters this way: “Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.” These Four Filters can enhance the probability of our investment success. My book is available at http://www.frips.com and, it includes a valuation case example of Kraft, KFT.

    Here is a 10 min. audio book summary:
    http://www.frips.com/4fsummary.mp3

    Bud Labitan
    http://www.frips.com

  23. Deco

    “Captain Lenihan” is a trained barrister. His ‘expertise’ is in the Law. And in his area of expertise, he has reigned for ten months and done absolutely nothing. Zilch. He pushed a proposal that was on McDowell’s desk when McDowell lost his job. Therefore I have no faith in Brian Lenihan as a Minister for Justice. What does Brian Cowen do with a minister who is failing to tackle crime, when crime is rampant and increasing ???? Cowen promotes Lenihan to run the country’s finances. This is an astounding piece of stupidity. We know Lenihan is lazy. But Lenihan knows absolutely nothing about economics. He is out of his depth.

    With a minister for Finance who knows nothing about Finance, and a deteriorating economic environment, we better all hunker down, give up the extravangant lifestyle and live within our means. The media is absolutely delighted that there is a ‘Dublin’ Minister for Finance. This is absolutely ridiculous. It proves that the media uses the ‘parish pump’ slur for politicians from the provinces, and endorses the ‘parish pump’ politician in the capital. This is very sectoral, and biased.

    Comments were also made about the fact that the current minister has the Lenihan pedigree. Utter nonsense. And if we are to take this seriously look at the legacy that he is following, Mary O’Rourke was the worst Minister for Transport ever. That Luas project was over budget, under specified, and over time. People don’t use the Luas for rush hour, because it is not sufficient. This is a disaster, and suggests that people can be trivial when taking responsibility for national projects.

    Brian Lenihan in charge of the state’s finances will be a complete circus !!!!

  24. Deco

    In the middle of his term as Minister for Justice, Brian Lenihan stated that therre was a perception that crime was a problem out of control, but that this was only a perception. That there had been too much dramatization. That the crime problem was not as big as everybody believed. Lenihan then proceeded to ‘talk up’ the merits of government policy. And he also sat on his hands. Effectively, we received loads of lies, and no action from a Minister in a state of lethargy.

    Based on his performance as Minister for Justice, I expect Lenihan the Minister for Finance to tell us that the problem is not really as seriously as the statistics are indicating. I am even suspicious that some of the metrics might end up being amended because of the political need. I also suspect that there is a lot of bad news about the economy which is being purposely postponed until after the Lisboa Treaty vote. I know of villages in the Midlands where unemployment is rocketting. Yes, it is not just increasing. It is rocketting !!! I visited a shopping centre on the outskirts of Dublin today, and for the first time since it was built finding a space near the entrance was really easy. I know of people in high tech jobs who are cutting back on holidays, weekends, and other items. There are rumours going around that country people are starting to grow their own vegetables again, in increasing numbers to cut down on bills. There are also widespread rumours of Polish and Lithuanian building workers going home in August, when their contracts, work will be finished. This will empty housing estates and drop rents, which is paradoxically a good thing for the economy, because it enables graduates to get buy on reduced salaries in the all important competitve sector. (Many of these graduates will be from continental and Asian countries and would otherwise find Irish living expenses unbearable).

    However none of this has shown up in government or ESRI statistics. I suppose this Lisboa thing has to be got through first with what ever is left of the feel good factor.

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