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The superstar of the slump

Posted on: October 25th, 2009

THE banking meltdown has thrown up surprisingly few heroes.

Despite their responsibility for the crisis, banks retain tentacles everywhere. Their superpower status is undiluted. Hidden links with bankers have often compromised otherwise credible players in the economic spinning game.

None are more compromised than Ireland’s club of in-house economists.

Consequently, human heroics on the phoney battle of economic forecasting are rare.

By now, most business junkies — but few of our more gullible citizens — have rumbled the utterly flawed nature of much of the economic commentary we are handed by the media. Economists from banks, brokers, auctioneers or the Government sing from the same hymn sheet. Feted by the media throughout Ireland’s economic armageddon, they have regularly surfaced giving their alarmingly similar — inevitably bullish — opinions.

Today they are all back on message: prosperity will return; Nama will work; the green shoots are already sprouting; the recession is over.

Last weekend, some of these compromised creatures deserted Doheny & Nesbitt’s pub in Dublin’s Baggot Street for the joys of the Park Hotel in Kenmare. The event was billed as a sober affair with robust, but polite, exchanges of views on the Irish economy. The rougher diamonds from Doheny’s were expected to adjust their behaviour for the more sedate surroundings of the Park Hotel.

Entertaining characters like TCD’s Sean Barrett and UCD’s Colm McCarthy are normally the main crowd pullers in an annual gathering of otherwise predictable economists.

Last Saturday morning on the platform in Kenmare sat two bankers — Pat Farrell, big chief of the Irish Banking Federation; and Pat Ryan, formerly a top dog at AIB.

Apologists for the banks, both men were sympathisers with the Nama project and consequently with the Government line.

On the other side, a bit broody, was one of the few great heroes of the Irish economy in recent years.

Professor Morgan Kelly from UCD took the podium.

Kelly causes a bit of a frisson wherever he speaks. He is less than popular among many of his peers. They have good reason: they got it wrong, Morgan got it right.

Back in 2006, when Kelly predicted the property collapse followed by the banking crisis, some of his fellow economists suggested that he was off his trolley — especially after he wrote a few high-octane articles for the Irish Times declaring that the banks were bust.

He reluctantly entered the current controversy because three years ago the consequences of the property spike seemed obvious to him. He watched and wondered in horror as some of his fellow number-crunchers with inflated reputations issued soothing prescriptions for the impending doom.

Kelly expressed amazement that house prices had soared at three times the rate of incomes since 2000. He boldly predicted a fall of 40 to 50 per cent in property values.

His opponents made weighty criticisms of his well-argued analysis. “Look at his mad eyes,” they would whisper in response, as he landed bullseye after bullseye on the economic targets that his rivals were missing. They scoffed at his prophecies.

Last weekend the appearance of Morgan — preaching his latest message to a gang of consensus economists — could have been seen as a bit of coat trailing. Writing provocative articles for the Irish Times is one thing, bearding his colleagues in their den is asking for trouble.

Morgan’s arrival on the stage with the two Pats was certainly destined to liven up a dull morning in Kenmare. Full marks to the organisers.

Morgan did not disappoint. He danced around the platform waving his arms wildly. He was passionate. He described the Irish banks of the two Pats sitting alongside him as “worse than zombies” because they were now completely dead. He dubbed Nama as “cash for trash”. And then, in a typical bout of heresy, he pronounced a death sentence on the great white hope, asserting that even if the crazy assumptions supporting Nama worked, the banks would still remain bogged down in debt.

Even more offensive to the po-faced audience was Morgan’s ability to produce numbers to back up his thesis that the solvency of the State was in question.

The two Pats are said to have sat stunned on the conference platform.

Suddenly, a third Pat surfaced from the audience. Pat McArdle, a one-time economist with Ulster Bank, could not contain himself. First, he let fly at the conference organisers, asking how they had allowed Morgan a platform to say what he did.

And then, in a personal attack on the UCD professor, he asked where Kelly had acquired the personal “wisdom” to make such dramatic forecasts.

McArdle led with his chin. Questioning the maverick economist’s right to speak was foolish enough, but querying his credentials was folly.

Kelly let loose with both barrels. McArdle had handed him the sort of opening about which he must have fantasised. Observers report that, typically colourfully, he opened his reply rhetorically with: “Who the xxxx am I to express a point of view on property and banking?”

And then he let rip, reminding the Ulster Bank’s former economist that he was the Morgan Kelly who had predicted the property crisis; that he was the Morgan Kelly who had warned that the banks were insolvent. He was too kind to ask McArdle if he was the Pat McArdle who had made such reassuring noises about the construction industry, just when it was on the edge of collapse in 2007.

Pat Ryan ex-AIB boss, tried to salvage some of the wreckage from the McArdle boomerang by taking umbrage at Kelly’s suggestions that the “banks are somehow subverting the State”. He was obviously worried by Kelly’s insistence that the State itself was being put in danger by the insolvency of the banks.

Yet Kelly’s argument is self-evident. The State guarantees the banks; they will only go under if the State can no longer meet the guarantee. Kelly believes that both are now in peril, inexorably linked to mutual recovery or mutual disaster.

Ryan — and presumably the other two Pats — feared that what were dubbed “inflammatory” remarks by Kelly might cause a run on deposits. Hence the move to curb his freedom of speech. What a wonderful excuse.

To be fair to McArdle, he later expressed regret for his rash remarks. But by that time the cat was out of the bag.

Bankers — no less than any other breed — welcome freedom of speech provided it never damages their interests. Orthodox economists believe that those who challenge the same official line are disloyal to their banking masters and to the State.

For far too long, bankers’ and brokers’ economists have been provided with platforms to peddle their self-serving views, reflecting the interests of their bosses and their co-conspirators in the Department of Finance. Their complacency during the property boom anaesthetised Ireland to the dangers.

If there had been more outlets and influence for credible, uncompromised economists like Kelly, the crisis could have been curtailed. No one should muzzle men of Morgan Kelly’s calibre. Instead, let us recognise a hero of the meltdown.