Morgan Kelly, once scorned, now a prophet
The only economist in Ireland to see early on that we were headed for disaster was the youngish Professor of Economics at University College Dublin, Morgan Kelly.
The YouTube video above is from the very beginning of the crisis, when the government laid out a mere $6 billion deficit as the worst case scenario.
I remember at the time that while everyone else was talking soft landings Kelly was predicting the mother and father of all crashes, not just for the property market but for the whole economy.
He was accused at the time (at the very start of the property slide) of being ridiculous, alarmist, a scare-mongering Jeremiah. He was laughed at, even sneered at, by other financial experts who regarded him as a maverick.
A view of him as an isolated mad Professor gained some traction because Kelly rarely appeared on radio and TV to defend his prophesies of doom. Instead, once every six months or so, he would write a piece for the Irish Times, always predicting new depths of disaster.
Well, those who laughed at him then are strangely silent now. It turned out, as we now know, that he was exactly right. He wasn’t the only one …. there were a few others saying the soft landing was going to be harder than we realized. But Kelly was the only one to predict the gigantic scale of the disaster that has befallen us.
Last May, for example, he wrote another The End Is Nigh piece for the Irish Times … this one predicted that the blanket guarantee given by the Irish state to Irish banks would bankrupt the country.
This provoked fury at official level and he was called irresponsible. Government Ministers warned about the dangers of self-fulfilling prophesy and said we needed to keep a balance in our comment to avoid spooking the markets.
What Kelly was suggesting was crazy, wasn’t it? The banking crisis couldn’t actually make the whole country bankrupt, could it?
After keeping his council all summer, the mad Professor was at it again a week ago with another lengthy analysis piece in the Irish Times on where we’re at right now, six months after his last tract of doom.
Given that he’s been right all along, it’s fair to say that this was the most widely read piece of financial writing here in the past year. It was treated a bit like Moses coming down from the mountain with the message on the tablets of stone.
So what was Jeremiah Kelly saying this time? Well he said that his statement six months ago that the bank bailout would bankrupt the nation had now been proved true and that it had happened much faster than even he had imagined.
The problem of the billions borrowed and lost by the big Irish developers was bad, he said. But even worse was going to be the tsunami of bad debt that was going to hit the banks as tens of thousands of people here defaulted on their mortgages in the coming months and years.
The notion that we were turning the corner was wishful thinking, he said. Instead we are going bankrupt at an ever increasing rate. Our bust banks have dragged us into an abyss that keeps getting bigger and bigger. The final cost of bailing out our banks is now going to be at least 70 billion, he said, not the 50 billion we had been talking about.
This huge black hole in the banks means that the money markets do not want to lend to us anymore, either to our banks or to the Irish state.
Every time we say we’re on top of the situation, it gets even worse. We’ve not only run out of money, we’re run out of credibility. We are, in effect, bankrupt.
Pretty soon, Morgan Kelly said at the end of his piece last week, the only thing we will be able to rely on will be the kindness of strangers.
This was a rather poetic way of saying that the IMF and/or the EU would soon be in here to bail us out, take over the running of the Irish economy and stop us becoming a totally failed state, where services grind to a halt.
Complete nonsense, the Government said. Kelly’s latest article was again dismissed as being way too pessimistic.
That was just over a week ago. As I write this, the latest word is that we are indeed on the brink of national bankruptcy.
A meeting in Brussels tonight (Tuesday) of Finance Ministers from all the countries in the EU will decide our future. It seems that Kelly was right yet again, and the speed with which events are now unfolding here is dizzying.
The official line is that the Government has not requested help either from the EU or the IMF, but that meetings with “our partners in Europe” are taking place.
But the game is up. Newspapers across the EU this morning ran headlines about Ireland being on the brink, about the need to rescue our economy without further delay before we endanger the future of the Euro.
And that is the core of the crisis. It’s no longer just an Irish problem. If we go down, then Portugal and possibly Spain will follow and that will mean the end of the Euro, the European currency. It’s that serious.
The problem, as Kelly said, is the blanket guarantee given by the Irish government to our banks which is now dragging the country into insolvency.
No one will lend to the banks here except the European Central Bank and the other European countries who fund the ECB are now deeply concerned at how much this is costing. The Irish banks are eating up so much ECB funding that there won’t be enough to help other countries in trouble.
The secondary market price of ten year Irish government bonds has eased from 9 to 8 per cent over the past couple of days, but this is still a rate that makes state borrowing impossible. So we’re not in the market. We have enough funds to keep going until the middle of next year, as the Government keeps saying, but that does not mean we’re okay.
Because of our huge budget deficit we will have to go back into the market next year to sell bonds to raise the money to pay our bills later in the year. The hope is that by severely slashing spending in the budget in three weeks, the markets will be convinced that we are on the right track and will drop the rates back to five percent or so.
But it’s far from certain that will happen. Equally far from certain is where Irish banks can get more funds to keep going. The Irish Central Bank has printed around 30 billion of paper to fund them over the past year or so and that can’t go on. Increasingly, other countries in Europe are asking why they should pour even more funds into the Irish banks when there is still no bottom to the black hole in sight.
And an even bigger problem for us now is the collateral damage this situation is causing to Europe. It’s quite clear now that, in spite of what the Irish Government is saying about not needing a national bailout, the EU wants us to take EU/IMF funding right now and sort out the problem before it gets any worse and before it drags other weak countries down as well.
Sources in Brussels say that behind the scenes the EU is putting severe pressure on the Irish Government to immediately accept around 70 billion in EU/IMF funding. The government is still saying No because of the loss of economic sovereignty involved, which will mean IMF people telling us what cuts to make, taxes to raise etc.
However it looks more and more like they will capitulate following comments made by Brian Lenihan after the European Finance Minister’s meeting in Brussels.
The mad professor is about to be proven right again.