The Cedar Lounge Revolution

More on the public sector ‘watchdogs’… July 31, 2010

…from Noel Whelan, who writing in today’s Irish Times has decided that Michael Somers, former head of the National Treasury Management Agency must stand in as a symbol of public sector watchdog failure in the crisis.

Jim O’Leary passes with flying colours Whelan’s ‘remorse’ test…what’s that you may ask? Read on.

Another speaker was NUI Maynooth economist Jim O’Leary, a non-executive director of Allied Irish Banks from 2002 to 2007. In a paper, extracts from which were published in this newspaper last weekend, O’Leary argued that while, with the benefit of hindsight, it is tempting to see the banking crisis as the inevitable consequence of the credit boom that was “not the way the future looked at the time”. He said that the prevailing belief during the boom was that there would follow the much-vaunted “soft landing”. O’Leary continued: “Of course bank directors understood that a much more malign scenario was possible but they trusted that the systems for monitoring and controlling risk ensured that banks would be adequately protected if such circumstances arose”.

O’Leary was sceptical about the “soft landing” view of the property market but seems not to have said that often enough or loud enough at bank board level. In a passage delivered in Glenties with obvious remorse, he added, “it is a matter of profound personal regret to me that I wasn’t more forceful in setting out the contrarian view and didn’t work harder at analysing its implications.”

So, more convincingly to my mind, does Bridget Laffan, member of the NESC…

She pulled no punches, lacerated recent governments for their errors in fiscal management and cited the 2003 decentralisation project for particular criticism. She accused Brian Cowen of “blame avoidance” in his recent speeches and depicted as absurd the Government’s attempt to blame the Opposition or international agencies for not telling them they were doing wrong.

Laffan was as tough on herself as she was on others. She asked why so few of the publicly-funded bodies established to advise Government failed to sound alarms. She declared herself “ashamed” of her own involvement in the National Economic Social Council’s (NESC) failings in that regard.

But what of Somers?

I asked Somers why he had this “feeling in his gut” about Anglo Irish Bank and whether he shared this queasiness with anyone else in the financial or policy-making system. I asked, if he did, what was their response, and if he did not, why not. In reply Somers attributed his reservations to instinct – a sort of banker’s intuition – and said that he “certainly had not” told anyone outside the NTMA about his concerns because he would “have been blown out of the water”. He suggested this was because of the standing which Anglo enjoyed in public, financial and political circles.

The NTMA had no regulatory function in relation to the Irish banking system but the fact that it, as one of the biggest depositors of Irish taxpayers’ money, felt it should limit the monies it placed with that bank was significant.

It is curious therefore that Somers, who was one of the highest profile, most respected and best remunerated public servants, chose not to talk about his concerns with other public or banking officials.

In all of the recent debate about the failure of the public sector dogs to bark warnings during the boom, it was unnerving to hear one of the biggest beasts on the public sector’s stage suggest that although he had concerns about Anglo Irish Bank he did not share them. It was particularly disappointing to hear him say so in a tone which, unlike that of other speakers at MacGill, suggested no remorse.

Hmmmm… it seems to me that the remorse test is going to fail on any number of fronts, not least because as noted here on the CLR previously, this wasn’t simply a case of watch dogs not watching (Whelan implicitly acknowledges as much that the NTMA didn’t have that sort of an oversight function). Instead it seems to me that this was a case of a systemic aversion to genuine intervention, indeed an aversion to serious regulation, by the state in the market, pretty much any market. That the watchdogs, as with the Financial Regulator referenced in the post linked above were not fit for purpose. No doubt about it, some could and should have spoken up, but it seems perverse to blame individuals (or as seems to be the case the ‘public sector’ in some nebulous sense) when in truth the system itself simply could not countenance the thought that the fundamentals that underpinned it were incorrect and the regulatory authorities such as they were and are were established precisely in such a way as to eschew serious regulation.

And that’s to ignore a point that Somers makes, which may be self-serving but may also have a kernel of truth, regarding the reception of any criticism of Anglo Irish. Consider the absolutely uncritical reception Sean Fitzpatrick [as referenced here] received in his comments on how our society should be structured mere months before his subsequent fall from grace and during the period where state funds were channelled to Anglo Irish.

More mood music on ‘selling off the silver’ of the public sector… July 29, 2010

In Prospect magazine – the issue dated July – Tim Leunig of the LSE writes about how public sector workers in the UK must work longer [though no longer than private sector workers] and their pensions shouldn’t be awarded on the basis of ‘final-salary’ in order to subsidise their pension provision. As it happens I’m not that exercised about the second point there. ‘Career average’, perhaps weighted slightly upwards somewhat, seems reasonable enough. But more interestingly in light of the debate on the cuts here are some of his thoughts on the situation more generally.

[George] Osborne needs to save a decent amount of money: we are hugely in debt and must pay back enough of it so that the economy can be bailed out next time it crashes. (there will be a net time, after all – capitalist economies are like that)… and [the measure(s) suggested] delivers big enough savings that we might just be able to rescue our economy from the recession of 2022 as well.

Three thoughts seem to me to follow on from that analysis.

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