University College Dublin's economist Morgan Kelly was openly mocked in the Irish press for predicting the Irish property crash in 2007. But no one's laughing at him now. The fact is he's been vindicated in everything he said.
Kelly predicted in 2007, based on evidence he'd studied from major property crashes stretching back to the 1970's, that Irish property values were heading for a terrifying 60 percent drop from peak prices. There was a looming iceberg ahead and Kelly's projected figures were, he says, a conservative estimate.
But prophets of doom get short shrift during boom times and he found himself scoffed at by Irish government ministers and by his colleagues in the media. Quickly Kelly even began to develop a reputation as a contrarian, a crank who opposed the Irish bank guarantee scheme. This impression solidified when he warned against nationalizing the collapsing Anglo Irish Bank and warned that the National Asset Management Agency (NAMA) was the wrong way for the country to go.
All of these well meaning but wrongheaded steps would saddle the Irish taxpayer with enormous debts and would risk national bankruptcy, Kelly predicted. He was resisted tooth and nail but he was right.
Now Kelly is no longer a lone voice in the wilderness. Others have reluctantly joined his chorus. For years Kelly was once the only voice challenging the official line of the Irish Department of Finance, including the banks and the stockbrokers. But now prominent fellow economists like Karl Whelan, Brian Lucey and Constantin Gurdgiev and financial analyst Paul Sommerville have raised their voices in protest with him.
"When I first saw Morgan Kelly's research, I said, "This can't be right, can it?" Brian Lucey, the associate professor of finance at Trinity College Dublin told the Irish press this week. "But he sent me the data and I couldn't find much wrong with it. The scales fell from my eyes. We were in for a mighty thump."
Kelly had concluded the Irish domestic banking sector was facing about 60 billion euro in losses, a figure that official government estimates are now approaching following Irish Finance Minister Brian Lenihan's revisions last week to 50 billion-plus.
"The government is converging rapidly with reality but we've wasted two years getting an honest appraisal," said Lucey. "They had plenty of advice available to them. Unfortunately they did the financial equivalent of trying to defy gravity."
Lucey said he and his academic colleagues Karl Whelan and Constantin Gurdgiev had briefed every political party on the crisis except for the ruling party Fianna Fail. They were not invited. Lucey then added it was a "terrible indictment" of the Department of Finance and the government that critics like them were not brought on board.
"The government had ideological preconceptions about the way they were going to solve this," Lucey added. The governments solution, NAMA, raised doubts about the efficacy of a 'bad bank' approach to dealing with unpaid property loans, Lucey said.
"The government imagined nationalising AIB and Bank of Ireland was the worst thing that could happen, but they didn't realise how bad things could get," Karl Whelan, a professor of economics at UCD, told the press. "I'm not convinced that we have seen the end of the loan losses at AIB and Bank of Ireland. With more write-downs to come on its non-NAMA loans, Bank of Ireland may also end up in majority state ownership."
"Experience from previous banking crises shows that bankers always try to save their own skins by understating the scale of the problems," said Whelan. "The government also didn't seem too interested in really getting to the bottom of the scale of the problem. Probably they felt they needed an honest assessment of the state of the banks like a hole in the head."
Ireland has moved past a national banking crisis into a full-blown sovereign crisis because of the Irish government's reluctance to face reality, retired banker turned finance analyst Peter Mathews told the Irish press this week. Having taken on so much debt to fix the banks, the Irish government may have dug a hole for the nation which it cannot emerge, he said.