How could a wealthy country in the developed world in the 21st century have a financial crash so bad it had to be rescued from bankruptcy by the IMF? Surely a crash on such a scale would be impossible, given all the financial checks there are these days in modern economies?
Well, of course it should be impossible. But, as we now know in Ireland, it's not impossible. Because that is exactly what happened to us.
Six years ago, in 2010, Ireland was in the middle of a crash so bad the IMF had to come in here and rescue us. The country was teetering on the brink of financial collapse.
Without outside help the banks would have closed, the cash machines would have run empty and the state would have been unable to pay teachers, nurses, police and all the other state workers who keep the country's essential services going, or pay welfare and other state benefits to those in need. To avoid this happening the Troika -- the IMF, the ECB and the EU -- stepped in with a massive bailout.
Why and how did this happen? Up to 2007/’08 Ireland had enjoyed a decade long boom which in its later stages was built almost entirely on a property bubble, pumped up by massive lending by Irish banks using funds they had borrowed on the international markets. When the bubble burst the Irish banks had tens of billions in property loans on their books that were rapidly going bad, although it took another two years or more for the full extent of the crisis to be realized.
Early in 2007 we were told that the difficulty in the banks was a temporary liquidity problem and there would be a soft landing in the property market. But instead property prices continued to collapse and the situation continued to get worse.
By the end of 2008 the banks were struggling and the money markets were refusing to lend to them, so the government stepped in with a blanket guarantee. This meant that the Irish state was underwriting all of the billions the banks owed, a move that was supposed to stabilize the situation.
As well as that, the state started putting billions into the banks to recapitalize them and allow them to repay debts. But the black hole in the banks eventually became so deep that the markets no longer believed the state could cope. Now as well as refusing to lend to Irish banks, the markets were refusing to lend to the Irish state, except at exorbitant rates.
The game was up and the only way out was a massive bailout from the Troika. The misbehavior of the Irish banks had brought down the country.
It's important that this is kept in mind because too often discussion of the financial crisis in Ireland simply blames the collapse of the property market. Of course that is true, but it is secondary.
The fact is there would have been no property bubble and collapse in Ireland if the banks had not enabled it.
During the book, the Irish banks broke all the rules of responsible banking as they competed with each other to grab as much as they could. When the bubble burst in 2008 they were hopelessly exposed.
They owed tens of billions they could not pay back. Some of them had blown away up to 10 times their capital. Every one of them was bust, or about to go bust without massive capital injections.
The crisis was so great it brought the country to its knees and resulted in the bailout and a program of austerity to reverse the huge budget deficits that had emerged when the revenue from property taxes had vanished.
Of course politicians were stupid to expand state spending so much on the back of revenue from property taxes. But the primary culprits in all this were the banks, which had financed the property boom in such a reckless manner.
To get to the bottom of who was to blame for this mess, the Dail set up the Committee of Inquiry into the Banking Crisis at the end of 2014. And last week, after more than a year of investigations and public hearings, the inquiry published its report.
Sadly, it tells us nothing we did not already know.
This is no big surprise because it was hamstrung from the very beginning. It was composed of backbench Dail deputies and senators from various parties, few of whom had any expertise in financial matters. So they were not really up to the job of questioning the bankers, regulators, civil servants and politicians who appeared before them giving evidence.
Even more serious was the lack of power of the committee due to legal restrictions. Unlike powerful committees in the U.S. Congress, it could not easily compel people to appear before it and, thanks to a recent constitutional court case here, it could not make findings of fact against any individual.
Instead it could only make findings in general against institutions, government departments and so on. Although there was some value in watching the main players in the crisis being questioned in public, the committee was toothless and its report reflects that.
A further complication was the fact that there are ongoing court cases both here and in the U.S. in relation to the former executives of Anglo Irish Bank, the key player in the crash. Avoiding any prejudicing of these cases severely restricted the work of the committee.
For example, Anglo's former chief executive David Drumm, who is currently battling against extradition from the U.S., could not be questioned, even by video link.
So instead of blaming any bankers or politicians in particular, the report reaches general conclusions. It tells us that the top bankers behaved recklessly and brought down their own banks. It tells us that the financial regulator was asleep at the wheel.
It tells us that government incentives overheated the property market and made the bubble worse. It tells us that the Central Bank was still predicting a soft landing for the property market when prices were plummeting.
The big baddie identified by the report conveniently is not Irish. It is Jean-Claude Trichet, president of the European Central Bank at the time of the bust, who forced us into the bailout and stopped the government from burning bondholders, resulting in billions of euro in extra debt being dumped on the Irish taxpayer.
So as we said, overall the report takes around 600 pages to tell us stuff we already knew. The crash was the culmination of poor government, a regulatory system that failed and bankers who behaved like cowboys. It is deeply disappointing, despite costing over €6 million to produce.
In relation to Trichet, who refused to appear before the committee, the report does have some interesting things to say about how he threatened then-Finance Minister Brian Lenihan that if Ireland did not enter a bailout program he would cut off the supply of emergency funds to Irish banks.
The reality is, however, that at that point in 2010 a bailout was inevitable. The rules about emergency liquidity assistance are complicated, but what is clear is that it is for an emergency and is temporary.
More contentious is the refusal by Trichet (with a little help from former Treasury Secretary Timothy Geithner in the U.S.) to allow Ireland to burn unguaranteed senior bondholders in the Irish banks, something that even the IMF was in favor of at the time.
The report says that Trichet's opposition to imposing losses on senior bondholders "contributed to the inappropriate placing of significant banking debts on the Irish citizen."
The National Treasury Management Agency in Ireland estimated that burning the unguaranteed bondholders could have saved Ireland up to €9 billion. Loading that on to Irish taxpayers to avoid bank contagion across Europe (which was Trichet's motive) was a disgrace. It may even have been criminal (and it should be tested in the European courts) since the ECB was exceeding its powers.
But it's important to keep it in perspective. We had to put over €65 billion into our banks to save them and our overall national debt is over €200 billion, so €9 billion was never going to solve everything.
It's also important to remember that two-thirds of our financial crisis was due to our budget deficits and one-third directly to what it cost to save our banks. That was down to the reckless spending by the last government buying votes. And the present government politicians, then in opposition, cried out for even more spending at the time!
When the property tax revenue collapsed we were left with a hugely inflated level of state spending that people then regarded as the norm. Which has made cutting it back in the austerity program very painful. The lesson is that in the future we need much more responsible politicians just as much as we need more responsible bankers.
The bankers who caused all this, apart from a few in Anglo, have got off with not even a slap on the wrist. The big boys in AIB and Bank of Ireland who were the main players in the property bubble are now all moved on to other roles or are retired on massive golden handshakes and huge pensions that the ordinary taxpayer who is paying for the mess can only dream about.
Of course our inquiry could do nothing about this. What we really need is new legislation to take the legal straight jacket off our parliamentary committees and give them real teeth.