Partial transcript:
(1:52)
What happened? We had a “boom”. We had a great boom! It really felt great!
It started, more or less, in the 1990s. We got FREE money Europe - regional funding. And, we got a lot of foreign direct investment. And all of that generated a lot of economic activity. And then, of course, and the way things are, a lot of the value that was created - the wealth that was created attached to land. And in Ireland we have wide-spread ownership of land. A very high percentage of people own their own homes, and we have a small-size farm structure throughout the country.
So, in general, there was a very good ‘feel good’ factor - everyone was feeling, you know - this is good. We’re coming out of our ‘perennial under development. The Irish are finally coming into the world.
Then, in early 2000s, consumption increased. We started building more houses - for ourselves. In a way, our productivity gains, more or less flattened, We stopped gaining in terms of productivity and we started paying ourselves very well. And, partly, we were paying ourselves very well because we needed to, because we had to pay our mortgages on the houses that we now felt we deserved. They were getting larger and they were also costing more in terms of the land element part of it. And the banks got in on the act. Essentially, there was rogue bank, the Anglo Irish Bank, but the others followed it very quickly in lending to a handful of developers - less than 10. 6 developers, really, more or less owed billions to the bank, because they thought they were ‘masters of the universe’: They had identified how to make money forever, and it involved development in Dublin, in Ireland, and in the UK, and around the world.
All of that - we had transaction taxes on property, so there was a lot of money coming in to government coffers. So, the government, in the early 90s, agreed to this idea of “Social Partnership” whereby the employers and the trade unions, essentially, and the government, got together and decided what salary increases should happen, broadly, for the economy, but mainly for public servants. And, it was linked to taxation. So the deal was, essentially: ‘We hold income taxes down if you hold salaries down.’ In fact, it didn’t work like that. The salaries of the civil servants went up. In general, everyone was gaining. The government was more than balancing its books. We had a Finance Minister who said, basically, and it’s a famous quote: “If I have it I will spend it.”
So, we were in surplus, but we did start a small sovereign fund. But, in general, the money ‘was spent’, and on public service and social benefits.
Meanwhile, the salaries of ordinary people in the private sector began to stagnate. And, as in America, what happened was, people took on debt to make up the difference. The banks got into completely ponzy territory. They didn’t have enough saving deposits to match the lending that they were doing with the developers, mainly, who, of course, ‘sold on’ to private owners and buying houses - and the mortgages. But, essentially, the greater part in the last three years before ‘the bust’ was loans to a small number of developers. This is very different from America. We didn’t have a sub-prime situation. In Ireland, people tend to pay their mortgages and it was seen as a very safe bet. And we got bond money from Europe, but all (?) were into the banks to fund these developers.
The Crash
2007
The Irish banks had bet most of their resources - their savers money and the bond holders money - on these speculative deals. These enormous speculative deals by this small group of people.
Property prices started slowing, and, of course, the economists, conventional economists said, “We’re going to have a soft landing. This is a necessary adjustment.” And they say this in the face of the fact that this has never happened before in a property boom - you never get a soft landing. What you get is a ‘crash’.
While we had our own economists and our media talking-up what was happening, outside investors, the bond market in particular, had another view of this, and they particularly started attacking Anglo Irish Bank - withdrawing deposits - and quickly the other banks got drawn into this as well.
And famously, on a late September date, I think it was the 28th of September, 2008, there was a late night meeting in government buildings, and our Finance Minister, for whatever reason. We don’t know what his advice was. He was advised, I think, by Merrill Lynch and others, decided to guarantee all of the Irish banks. And, not only the traders and depositors, but all of the bond holders, and not only the senior bond holders, but ALL of the bond holders. Even the unsecured bond holders. Now, they thought, obviously, that it was a ‘liquidity problem’ but it quickly turned out to be a ‘solvency problem’. In the end of the day, no matter what they did, they set up a ‘bad bank’ called NAMA. They took most of the BIG bad loans from those banks. They discounted them by - whatever - 60% and they took them on their books and they felt the bank should be able to manage after that.
But, in effect, they couldn’t manage. Depositors fled, continued to flee, and the situation was such, essentially, that the Irish government couldn’t borrow from the bond market because they felt that the economy wasn’t sound; that it had made a big mistake in underwriting the banks, and in the end of the day, a ‘bail-out’ had to be accepted from what’s called the Trioka. That was an ‘austerity’ and balancing the books the price of that bail-out.
Now bear in mind that our public finances were in surplus before before the bank crisis. But after the crisis, not only did we have to pay back the troika, the receipts, since property had collapsed as well, so the government wasn't even bringing in as much tax income as they had before, and things were looking very bad.
So why did it happen?
It did not happen because planning regulation restrict the amount of land that was available, driving up the value of sites. That is not what happened in Ireland. I hear this argument in the UK, saying the reason why property values are going up, and are now going up in London, is because insufficient land is zoned for housing, in particular.
We had 3 to 5 times the amount of land that you could conceivably want zoned in our country, around our settlements. And apart from that, we had a situation in which you didn't even need to have land zoned for getting planning permission in the open countryside. In fact, 30% of all the housing was self-build in the old countryside. So, we had no restrictions, really, on the amount of housing that got built.
So, it wasn't because of a restrictive planning regime that land values went up. It went up because of the availability of credit.
Banking regulation:
Some people say that if we'd had better banking regulation we wouldn't have had the problem. There is no doubt it would have helped, if we had tidied up our regulation. In other words, if we had prevented the banks from lending more than 80% of the value of the house, for instance, to first-time buyers, or to buyers generally, and that would have, in a way, slowed down the construction and development exuberance and so on.
The problem was, we are in Europe, with an open market, and we already had European banks competing with Irish banks. In fact, it was the European banks that were the first ones that brought in the 100% mortgages, as far as I know, and everybody then had to catch up. You can't really easily regulate your banks in a small country where the money isn't your own money. You are using a third-party currency. They, banks in other countries, could operate in your country under their own rules. In some cases they operated under Irish rules. It was possible for them to operate in Ireland under regulatory rules of their base country.
Yes, regulation was important, but it wasn't sufficient reason. If you look in other EU countries where they had broadly the same regulatory system, they didn't get the same kind of 'boom and bust'. So, what else did they have is the question. What was the real cause?
I have to talk about home ownership incentives. This is a quote from Colm McCarthy. He is an economist operating in Ireland who likes to speak his own mind. I don't agree with him in every respect, but I respect the fact that he always writes independently and is not politically beholden to anyone. He said:
"Imputed tax on housing is not taxed in Ireland. We've had mortgage interest relief on mortgages for a long time. They were there consistently. There is no local tax; there are no rates or property taxes on domestic dwellings in Ireland, at all. And if your sold your house, and it is your prime residence, there is no capital gains tax." – Colm McCarthy
So, as he's explained, most of the developed countries may have one or two of these goodies for property owners, but only Ireland had all of them. And not only that, but they were further tax reliefs if you build in certain locations. So if you were to build, say, along the Shannon [river], which is an undeveloped region of the [west] coast, and so on, you could offset the capital cost of the construction against your income tax. Not just the rental income, but your income tax. So we had no real taxes on your own home. And further, we had incentives, basically, to put your money into property. And I'm quoting here Michael Hudson. He says,
"If you don't tax that value that attaches to land, arising from the general wealth of the economy, the banks get it." – Professor Michael Hudson
The banks got it. They turned it into a kind of money backed by debt, essentially phony money that wasn't backed by real productivity. That essentially led to the boom and that subsequently led to the bust.
I'm an architect, so I'm interested in the physical effects of this: Very unsuitable sites were developed around remote villages, flood planes— completely unacceptable sites got planning permission from 'connected' politicians, essentially. And houses were built. And people occupied them, certainly in the earlier part of the boom. In the later part, nobody would buy them, so we now have 'ghost' estates.
Most of our new housing was built speculatively, similar to the UK in that regard. In other words, the builders built them and then they'd look for the buyers. Except for the one-off houses —if you had lived in a rural area or your family had access to land— but most of the rest is built speculatively, so there was very little commissioned and that has an effect on the final form.
So, you get identical houses, practically, Cul-de-sac estates. An 'estate' is an invented spatial form, very different from the kind of village or town form that we had in Ireland before. Of course, we had many, many one-off houses arising from the fact that people thought that a large house—a property, is wealth you never loose. That, in many cases where young people got land for nothing from their parents, instead of saving money and building a normal-sized house- 1500 sq. ft., they instead built what they considered a normal-sized house which was 3000 sq. ft. So they invested all of their money in constructing fancy mansions for themselves - 5 bedrooms. These are young people who aren't even married. And, in general, because of this attitude —we got from the Americans— that if you own your land you can do whatever you like with it and that is somehow part of our tradition. It was very difficult to oppose them.
The environmental groups that did try to oppose them were demonized; placards and intimidation and editorials in the newspaper, and so on. So, during that time, you could make money simply by the conversion of the land from agricultural use to a higher use — to housing use, that's where your money is made. Or, if you converted an inner city site, an urban site, from a lower use to a higher use, or a higher density use, that's where your money was made. You lost money on construction and design: that was the view of the developers, generally speaking, so they minimized that. Now, in Dublin, where there was more competition, the design quality did go up because you were using existing sites that had high value already, so you had to distinguish yourself with design and construction quality, but in general, we built 50% of our existing stock during that period of time and we got lousy buildings. We did not build them to the energy standard …[video stream cut short.]
