Airbnb: Sharing, Disrupting or Predator?

Paul Sweeney: Airbnb argues that “Airbnb and our community are part of the new Collaborative or Sharing Economy, a movement that enables people to access new economic opportunities, promotes entrepreneurship, strengthens communities and conserves resources.”

                                                        Go live to the map above (Live only on computer)

Brexit: What does Teresa May’s veiled Brexit threat really mean?

Paul Sweeney: Brexit is a slow train crash. Most damage will be done to Britain, but some damage will be done to the European project and to the other European 27 members. And the consensus that Ireland will suffer more than others states is probably correct. But the British exit may have a wee silver lining.

                                                        Teresa May, UK Prime Minister.

Ethics and regulation: complements, not alternatives

Last week former Taoiseach and President of IFSC Ireland, John Bruton, said that the banking industry needed "to focus on ethics rather than regulation". As someone who strongly supports the idea of ethical codes and a more central role for ethics in business, I found this remark and the casual way it was accepted unhelpful on many levels. Ethics are not an alternative to regulation; rather regulation is needed to support ethical behaviour. 

First, what do we mean by ethics in business?  There are many approaches; to illustrate why ethics are not an alternative to regulation, consider just three. 

You can take a deontological approach, like that that of most religions, and impose an absolute moral code.  Something is either right or it is wrong, no exceptions. You can see aspects of this in some corporate codes of conduct: some things such as fraud, insider trading or forced labour are simply prohibited, regardless of the consequences at the time. These things are unethical – everything else is OK. Because of the inflexibility of prohibiting an action, the list tends to be a short one, and not very useful for complex “grey area” situations. 

In contrast, a utilitarian or consequentialist approach hinges on the idea that the morality of any action is completely determined by its consequences.  So in its purest form, faced with a decision, you could weigh up the impact on all parties and choose the course of action that minimises harm or maximises good. So while stealing might be “wrong” under a deontological approach, utilitarian ethics might allow it under some circumstances, such as the theft of food from a profitable business to save the life of a starving child. This is pragmatic and useful, but depends on the person making the decision having been really well trained; unless business schools and professional institutes put serious weight behind teaching the process of ethical decision-making, it is unreasonable to expect individual employees to respond in the best possible way when making snap decisions in a fast-moving and high-pressure environment.   

As a final example, a virtue-based approach to ethics comes from Aristotle’s ideas of how to be, rather than what to do.  A decision on a particular situation could be reached by asking, “Am I the sort of person who would ...?” or, “Are we the sort of organisation that ..?” This can work really well for individuals, but won’t work in business unless everyone in the organisation is aware of and supports the sorts of virtues or values that the firm as a whole espouses.  Since these values are not based on rules, they must be embodied by the leaders within the organisation – a kind of ethical role-modelling which be either positive or negative, depending on who’s in charge and how they behave. 

Now the question is: which of these approaches, bearing in mind that they are only three of a myriad of ways of describing and understanding business ethics, could credibly act as an alternative to regulation in an industry as cut-throat and prone to moral hazard as banking? 

The absolute moral code of deontological ethics is barely compatible with capitalism, and would be either limited or diluted by its application to profit-seeking financial innovation. The utilitarian approach is pragmatic but time-consuming, and depends heavily on training. Virtue-based ethics comes close to a personal ideal, but depends on individuals to an unsustainable degree.   

They are all good to have in an industry, but will never work alone.

The trouble with ethics in isolation is that unless they seem coherent with the overall climate in which an individual is working, he or she will lack the confidence to “do the right thing” even where the “right thing” is clear.  I might know that stealing is wrong, for example, but if all of my peers are routinely cleaning out the stationery cupboard and falsifying expense claims, then my personal belief is constantly challenged by the daily experience. This is where regulation – clear rules of law with penalties and consequences for non-compliance – will support ethical standards, reinforcing rather than replacing them.  

Of course regulation also has the happy advantage of being effective even for people who would never embrace an ethical code. Even sociopaths fear the law. In that sense, regulation has a wider impact than business ethics, and is a baseline if we are to expect better corporate behaviour. Without punishments, some people will never obey rules.  But most employees are not sociopaths, so training in ethical decision-making will also have a useful effect, enhancing the impact of regulation, and ensuring that it is implemented in spirit as well as in statute. 

What the industry needs is not "to focus on ethics rather than regulation," but to enforce regulation and resource ethical training. Then we might see the change we need. 

Sheila Killian

@islandtotheleft

IFSC shadow of its intended self

In an opinion piece for the Irish Times today, Jim Stewart concludes that "In the short term, changes in tax regimes raise issues for economies dependent on financial centres or low-tax regimes as a key component of economic strategy. But longer term, tax-haven type activities are unlikely to provide a basis for a diverse, skill-based economy. Such activities may attract an increasing share of resources in terms of talented individuals working on tax and regulation avoidance activities and in terms of State agencies and legislators ensuring tax and other legislation facilitates the operation of low-tax, low-regulation type activities. Such legislation may in turn unintentionally diffuse to the wider economy.

As a result of the economic and financial crisis, a new political economy is emerging within the EU. Competition for investment via low tax rates and light touch regulation may no longer be an option." You can read Jim's full article here.

How to prevent stunning failures of corporate governance?

Nat O'Connor: In a major speech on the economy to the North Dublin Chamber of Commerce, the Taoiseach said that "Individuals were left in dominant positions within individual financial institutions for too long a period. There were stunning failures of corporate governance and not enough turn-around in management personnel in those institutions."

There is a growing consensus that we need to put in place new rules and laws to prevent the recurrance of such stunning failures. But the detail matters. How can corporate governance be strengthened?

The Taoiseach's speech mentioned the "the outlawing of unforgivable malpractices", but specific commitments on new laws are limited.

One specific statement was "We must also ensure that there are new standards of corporate governance including limits on the timescale which any chief executive or chairman can serve in a bank. If legislation is needed to achieve this it will be introduced." (The alternative to legislation is to continue with the existing voluntary code of practice, which asks companies to comply or else explain in their annual reports why they did not comply).

When announcing the details of new rules on bank directors' corporate governance, the Taoiseach's speech merely states that "The Financial Regulator has recently announced new corporate governance rules. This involves a clear separation between the roles of chairman and chief executive and new standards relating to the composition of boards of directors."

But 'rules' are not the same thing as 'laws'.

The new financial regulator has made a number of addresses lately, including a presentation to the Oireachtas's Public Accounts Committee where he stated that: "Regulation in Ireland was not robust enough to prevent the asset bubble and the Financial Regulator‟s reliance on some boards and management to meet their corporate governance responsibilities was misplaced." Most of his speech focuses on the strengthing of the supervisory and regulatory rules and procedures of the financial regulator, such as improving skills, implementing a new risk model, building enforcement capacity, etc.

Yet, regulation is not the same thing as corporate governance. The latter is when companies take it upon themselves to have a robust mechanism where tough questions are asked, and decisions scrutinised, in the long-term interest of the company and its stakeholders. The regulator may sometimes check up on governance, but good governance its valuable for companies for its contribution to the long-term success of their enterprises.

There are also some mixed messages in the regulator's speech. At one point he says that "The cost of regulation will undoubtedly rise. But judged in the context of the huge cost of a financial crisis, the increase in the cost of regulation must be seen as a price worth paying." Yet later on, he states that "Ireland needs to be wary of the Sarbanes Oxley experience. It is important to be cautious about new measures which could significantly increase costs, especially if the standards being audited are too vague or extensive."

There are two points to raise about the above. Firstly, they mostly address financial institutions and do not necessarily apply the same level of rigour to other areas of corporate governance. Secondly, while there is a strong focus on rules and regulation, very little substantive legal change is proposed for corporate governance. Indeed, very little is being said about how companies run their affairs.

On the specific question of loans, the regulator may have identified one of the 'unforgivable malpractices' that the Taoiseach wants outlawed. The regulator said that "Loans to bank directors and senior management have been subject to abuse and excess, if not outright subterfuge." He is proposing a legal code of practice to ensure lending occurs on an 'arm's length' basis.

The only other mention of legal requirements are the Taoiseach's proposal to legislate, "if necessary", for limits on the length of time directors serve on boards.

TASC's Mapping the Golden Circle research identified that the potential risks to good corporate governance are present in Ireland, including directors potentially having a lack of time and facing divided loyalties. And also excessive remuneration and a lack of diversity on boards lending themselves to 'groupthink' and other potential risks. Chapter 6 of TASC's analysis looks at corporate governance in more detail.

TASC proposes that new, stronger legislation on corporate governance is needed to protect the public interest, not only for financial instituions, but for all private companies.

TASC's specific proposals include:
- Limiting the number of multiple directorships a single person can have. The law in Ireland currently allows 25 (where a group of subsidiaries only counts as 1). The regulator has suggested 3 maximum (in the financial sector).
- Limit remuneration
- Require boards to have 40 per cent women (like Norway, France and Spain).
- Require boards to have employee representation (like some US States, Germany and many other European countries).

TASC also argues that State-owned bodies should come under stronger law about corporate governance, not weaker (as is the case at present, at least in some areas like the amount of information made available in their annual reports).

These are not outlandish suggestions, but rather reflect successful models of corporate governance from other countries. When we consider how many hundreds of thousands of people lost their jobs or lost massive parts of the their pension funds or lost their investments, it should be clear that the public interest matters. We are all stakeholders in the good, open governance of businesses. Hence it is time for strong legislation to make it clear to the boards of directors across the private sector the standards and ethics that are expected of them, including protecting all stakeholders and respecting the wider public interest.

Counting Vacant Houses (And Their Cost)

Nat O'Connor: A lack of reliable information about the housing market contributed to the housing bubble and subsequent crash.

The National Institute for Regional and Spatial Analysis (NIRSA), based in NUI Maynooth, estimates that 302,625 housing units lie vacant. Yet, Michael Finneran TD (Minister for State with responsibility for Housing) is reported as recently telling cabinet that there were 100,000-140,000 empty housing units. And the construction industry claims there are only 40,000.

This level of disparity about the basic facts is madness.

You can read about the NIRSA report in the Irish Times and more details of their calculations in a blog piece by the report's authors (one of whom is NIRSA's Director).

We knew something was going badly wrong in the housing market when supply grew, yet prices also rose enormously. The growth in land prices fuelled this, but in hindsight the lack of public information on the housing market allowed developers to time the drip-fed of new housing units into the market to maximise profits.

Accurate statistics about the number of empty housing units in the country could have helped people calculate realistic house prices before and during the bubble. Such statistics might also have helped planning. Instead, we have now ghost estates where few people want to live.

Like the follies built by poorhouse workers during the famine, it seems that these estates have no real utility and there has been talk of demolishing some of them. I'd like to know more about the arguments for this. Are they so sub-standard? Are they so far removed from good roads and potential jobs? Knocking down some of these estates could also be seen as an attempt to decrease supply in the market and thus bolster house prices across the board.

What is the loss to the State if NAMA accepts some of these estates (even with a discount) in exchange for writing off bad bank debt? If even a small number of them are demolished, than the remaining land value (minus the cost of the demolision and waste disposal) will not be worth whatever bad debt NAMA would write off against them at a 30 per cent discount. Alternatively, the long-term consequences of trying to make some of these estates viable will also involve annual costs to the State. For example, if planned badly (or with inadequate resources) the human and financial costs of turning some of them into social housing ghettos could be high.

Then again, many housing units acquired by NAMA could be an important element in moving thousands of people off the waiting lists. However, if it can be shown that it is better to demolish some of them, it would also be better to plan this rationalisation through a coherent national housing strategy, and for NAMA to be barred from accepting them into State ownership in exchange for bad debt.

Meanwhile, for ordinary workers who are living the consequences of the failure to regulate the housing market, Citizens Information have teamed up with MABS to put the most salient advice on a microsite: keepingyourhome.ie

It is obvious that many families are under serious pressure to keep their homes. Many more will be paying rent and mortgages (for years to come) at rates that are way over the one third of net income threshold for 'affordability'.

Yet, at the same time, there are over 300,000 vacant housing units in Ireland.

The Division of Power Requires Stronger Accountability Institutions

Nat O'Connor: Many current news stories are about accountability, either seeking it or the lack of it. In some cases, there is a clear public understanding of the process we use for seeking accountability. But when it comes to the causes of the banking crisis, there isn't.

Ireland has a number of what you might call 'accountability institutions'. The reports of Eamonn Lillis's trial for murder are familiar territory for most of us. We know about the role of the judge and jury, the prosecution and the defence. We know that Lillis is innocent until proven guilty and that the prosecution are looking for evidence that indicates Lillis's guilt 'beyond all reasonable doubt'. If it were a civil proceeding, only the lower threshold of 'the balance of probability' would have to be met. And in either case, the trial is held in public and reported daily. Most importantly, the proceeding guarantees some kind of result. Either he's innocent or guilty; and if guilty, the judge will impose some kind of sentence.

However, when it comes to the banking inquiry, we seem to lack a sense of how we get accountability. What is the correct place for the inquiry to occur? Who should be involved? What is the correct threshold for evidence? And what guarantee do we have about the outcome?

Maybe the most pressing question is why is this a choice for the Government? Whatever happened to the idea of the division of powers? In parliamentary democracies, one role of the legislative is to hold the executive to account. In the case of our parliament, we were reminded that Oireachtas committees do not have the right to make judgements about disputed claims of fact. This would appear to be a real weakness.

Why don't we have accountability institutions that get automatically activated for public interest inquiries, in the same way that the courts are activated when the DPP decides to prosecute. It is not unreasonable to suppose that a strong, independent inquiry might uncover some embarrassing findings for the Government. All the most reason why governments should not have the power (and temptation) to set up weak or slow inquiries.

What we have had, over the last couple of decades, are a series of ad hoc decisions by successive governments to use different institutions at different times, including tribunals, Oireachtas inquiries (e.g. DIRT) and various commissions of inquiry, such as the Government is proposing in relation to the causes of the banking crisis. Even institutions of the same type work differently in the detail. For example, bizarrely, the Moriarty Tribunal transcripts are copyrighted to a private company, unlike the other Tribunals, which publish their transcripts online.

The Tribunals have been a hugely costly way of patching the gaps in our system of accountability institutions. Setting up some sort of permanent mechanism that can be activated to deal with public interest inquiries would seem to be a priority, whether it is through giving Oireachtas committees more powers or through some other body.

In relation to the Government's proposed commission, according to the Irish Times, the Minister for Finance has said that "an Oireachtas committee would then have an opportunity to examine the report and call witnesses if it wished". But this exposes another weakness in the balance of power. Except for the Public Accounts Committee, Oireachtas committees are chaired by a Government appointee and they all have a pro-Government majority. Hence, their ability to provide independent and robust analysis is limited, especially if there is anything embarrassing to the Government.

The lack of consistency and potential weakness of public interest inquiries is not the only gap in the system. Yesterday, Transparency Ireland launched a report into the weak whistleblower protection in Ireland. Transparency Ireland argue that: “We know what we know about corruption in our banking system and regulatory failure because of whistleblowers. Yet those who would report wrongdoing in our banks and public service still have little or no legal protection or guidance. The situation doesn’t just leave thousands of people exposed to disciplinary or legal action - it leaves the country exposed to another financial crisis”. They are calling for a universal system, like the one that works well in the UK, which will protect whistleblowers everywhere in the State equally. The full report (PDF) can be read here.

Various whistleblowers spoke at Transparency Ireland's launch yesterday, including Eugene McErlene, who was the internal auditor who exposed overcharging in AIB in 2000/2001. McErlene spoke of the very difficult experience of being "isolated" when he spoke out about the wrong-doing that he uncovered. There simply were no adequate accountability institutions in place to which he could turn to. It was very revealing to read an article from last year in the Irish Independent reporting that McErlene does not hold a grudge against AIB. Instead, his frustration was directed at the Financial Regulator.

The issue of how best to find out the root causes of the banking crisis is not just about the detail of the proposed commission such as who's on it, or how many sittings will be private or public (although these are important details). We need to take a long, hard look at our whole system of accountability institutions, from the Oireachtas to the regulators, which are meant to investigate errors and wrong-doing. And the division of powers in a democratic state requires that strong independent accountability institutions will be activated when the public interest requires them, even if their findings may be embarrassing to the executive of the day.

Guest post by Rory O'Farrell: Gombeens and Gosplan

Rory O'Farrell: Much as the economy of the Soviet Union was criticized for having a bloated economic planning bureaucracy (Gosplan), the Irish financial sector should be criticized for its bloated size. In 2008 the sector absorbed over 10% of our economy. This is a huge price to pay for the ‘efficient allocation of capital’. On Wednesday, 13th January, the European Trade Union Institute (ETUI) organised a conference 'After the crisis - towards a sustainable growth model'. Though it had a European focus, many of the topics discussed are relevant to Ireland in creating an ‘exit-strategy’ for the financial sector from the recession. While Brian Lenihan has been acting as the financial sector’s fireman there has been a focus on short term (bank guarantee) and medium term measures (NAMA). Concrete long term proposals for changes to regulation have been largely absent from the public debate. What we want from the financial sector should be examined.

At the conference Hélène Schuberth (Austrian National Bank) said what is missing from the European discussion on financial market regulation is the question: what function should the financial system perform? Hélène Schuberth noted that the reform initiative has been minor, and does not emphasize that the financial sector should service the economy. She noted how the financial sector gains rents at the cost of the rest of the economy. While the financial system is supposedly a shock absorber this has been shown not to be true. Sony Kapoor (Re-Define) noted that this is not the first banking crisis. The financial system should be a means to a purpose. He stated that the financial sector is not competitive, and that in the US 30-40% of all corporate profits went to the financial sector, and this is taking rents from the real economy. He asked, if the human resource department of a firm was responsible for consuming 40% of the resources, would this be seen as a well functioning department? Competition within the financial sector is required. However the financial regulators favor large complex banks over smaller simpler banks. Sony Kapoor agreed that the massive state subsidies have contributed to the bloated size of the financial sector

Possible changes to banking regulation included a shift to Asset Based Reserve Requirements, as suggested by Tom Palley. Here, the reserve requirements of banks would be based on the amount of loans they have given rather than the amount of deposits they hold. Yanis Kitromiledes suggested a move back to public service banking or narrow banking. Karel Lanoo (CEPS) stated that so far the debate on a move to narrow banking has been merely academic, and that mutual banking and co-operative banks should be reconsidered. Competition policy should be used so that banks do not become too big to fail, and banking should be viewed as a utility, similar to gas and electricity.

In Ireland the financial sector gains a massive state subsidy in terms of free insurance as Irish banks are too big to fail. This takes the form of deposit guarantees, NAMA, and the implicit free insurance given by the government on banks risky activities. While the economy does benefit from employment in the International Financial Services Centre, these jobs are effectively subsided by the governments of these branches parent firms. Countries like Germany have no interest in subsidising such jobs in Ireland and it is only a matter of time before EU regulations will make such jobs untenable. While subsidies to other sectors such as agriculture have social benefits for rural Ireland, the financial sector subsidy results in large inequalities, and diverts talented workers from careers in areas such as engineering or computer science.

At the moment the Irish government is proposing contradictory policies of ‘stopping reckless lending’ and ‘getting lending going again’. No long-term plan has been put forward for the financial sector. The government should no longer promote the financial sector as an end in itself. In the Irish case it is interesting that there are no moves to increase competition in the financial sector. If anything the number of banks is being reduced. Competition can be increased by promoting mutually owned ‘boring banks’ that have been successful in the past. Also, with the notable exception of Irish Nationwide, the mutual financial sector (namely EBS and the credit unions) have not suffered as much as the rest of the financial sector. The massive state subsidy received by the Irish financial sector could be put to better use in the real, productive, economy. The financial sector should be made to pay its own way.

Luckily our first official language has given us the word gaimbín, meaning monetary interest, from which comes the word gombeen, an apt description for the leadership of the Irish financial sector.
Rory O'Farrell is an economist and researcher at the European Trade Union Institute in Brussels

Lobbying and de-regulation: an IMF view

Paul Sweeney: The IMF – not known as a progressive organisation – recently published a research paper which showed that those US financial institutions which were involved in the risky loans triggering the global financial crisis in 2007 were the very ones which were most active in lobbying against stricter regulations on excessively risky financial activities.

The paper is called A Fistful of Dollars: Lobbying and the Financial Crisis. It was written by Deniz Igan, Prachi Mishra, and Thierry Tressel and has just been published (in December 2009). The authors claim that “to the best of our knowledge, this is the first study documenting how lobbying may have contributed to the accumulation of risks leading the way to the current financial crisis.” It’s a bit technical, so some readers may hop to the conclusion, on page 27.

The firms most engaged in lobbying against financial regulations also received a disproportionate amount of financial bailout cash from the Bush administration in late 2008, when the total collapse of the US finance sector threatened.

In Ireland, we know how strongly opposed Seanie Fitzpatrick (Anglo Irish Bank), AIB and all Irish banks were against regulation. Regrettably, those in positions of power in Government, in Finance and the Financial Regulator heard them and sat on their hands.

Personally, I was strongly opposed to the de-regulation frenzy in Ireland in the false boom between 2001-2008. For example, back in 2005, Peter McLoone (then President of Congress) and I were the only two members of the 16-member National Competitiveness Council to oppose the low direct tax and anti-regulation views of the other members of the Council in a Minority report on the Competitiveness Challenge in 2005 (p27). We said that we did not regard “the regulation of business and the labour market as ‘burdens’.”

The Council extolled the low regulation regime in Ireland. The report of the majority said “one of the strengths of the Irish business environment over the past decade has been the light administrative and regulatory requirements faced by firms particularly compared with other EU countries.” It went on to cite financial services as one of the most successful internationally trading sectors which was attracted here because “the level of regulation on Irish industry is perceived to be light relative to many of the other countries benchmarked". It also stated that “regulations are not perceived to significantly inhibit product market competition in Ireland.”

The main 2005 NCC report then warned of the danger of “rising regulatory compliance requirements” and of the need to check the “Growth of “Red Tape” (capitals!) and what it called the “Regulatory Compliance Burden” (again, capitals!). It also said Ireland’s rankings were deteriorating, due to increased “regulatory compliance requirements” and the “impact of recent corporate governance legislation in particular.”

In hindsight - these extracts shows how strong the anti-regulation (and anti-tax) environment was in Ireland! In a long introduction, Taoiseach Bertie Ahearn gave the report a strong endorsement, though he focused mainly on productivity, the low income tax regime and “managing our public finances responsibly.” He also boasted of our “enviable fiscal position!” No wonder the regulators took their cue and sat on their hands. And the Irish economy crashed to the ground.

If the IMF can examine part of the reason for the implosion of banking in the US, then here we do need a Commission to see why the whole Irish banking system collapsed and also to review the response to the crisis. It needs to examine how a whole ethos can develop and envelope an economy. It should examine why other voices were seldom heard against the development of such a dominating ideological perspective - one that was ultimately so destructive. Diversity of opinion can help to ensure that it can never happen again.

IFSRA: The financial regulator which failed

Anon: On January 1st 2010, we saw how the basic philosophy of IFSRA, and the key people, seemed to be informed by the philosophy of “free” markets and the need to keep state interference or regulation to a minimum. Yet the government established an agency with 350 staff and a big budget to “regulate” financial markets. This was hardly just to follow European Central Bank rules?

On the establishment of IFSRA in May 2003, the first chairman Mr Brian Patterson said: "Good regulation is good for consumers and it's good for the industry." He said the authority would be a "passionate proponent" of the public interest.

He defended the composition of the authority's board, which had been criticised in certain quarters as lacking a consumer champion. "This is not meant to be a representative board but a public interest board," he said.

IFSRA was to be responsible for regulating more than 4,000 entities and had a budget in excess of €20 million per annum back then. It rose to €50m by 2006, the apex of the frenzied bank lending, and it is €63m today.

An interim board of IFSRA had been set up by Finance Minister, Charlie McCreevy, in April 2002.

IFSRA had a limited degree of independence from the restructured Central Bank, which was re-named the Central Bank of Ireland and Financial Services Authority (CBIFSA). The restructured Central Bank continued to be headed by the governor, “Mr John Hurley, who had the over-arching role with the IFSRA, and Mr Patterson and the board will be accountable to him.”

Mr Hurley, the former Dept Finance Secretary General, was also influential in creating the regulatory system and system of regulation.

The members of the Authority are as follows, entering 2010:

Thus it can be seen that there are nine members of the board of IFSRA today. Two-thirds, or six members, are original/founder members and are still on the board. There had been ten members of the original board. New members were Alan Gray and Tony Grimes, appointed in December 2006 and May 2008 respectively. The three who left were Patterson (Chair), Danz, and O’Reilly (CEO).

Contrary to good governance, none of the directors’ other interests, ages, or main occupations are even listed in the IFSRA Annual Reports (which are not available before 2005).

Jim Farrell, now Chairman, was an original member from 2003. He was appointed chair in May 2008, when Patterson stood down. He was a senior executive with the National Treasury Management Agency and was first chief executive of the state’s National Development Finance Agency and has “extensive experience of international banking.”

Alan Ashe, original member from 2003, is former managing director at Standard Life Assurance and chairman of the Rotunda Hospital. Shane Ross wrote, in his usual style, that “Alan Ashe pretended to retire in 2000 when he left the top job in Standard Life (Ireland) at the tender age of 58. His 12 years there had been preceded by another dozen in the TSB and a long period in manufacturing industry. To serve on IFSRA's board, he felt obliged to give up as a director of two promising companies, Stella Life Assurance and Business Solutions Ltd. The possible conflict of interest forced him to make a choice between service to the State or to the private sector,” Ross concluded.

John Dunne was formerly Director General of IBEC, the employers organisation, until 2000, and is Chairman of the IDA today.

Gerard Danaher is a barrister, closely linked to Fianna Fail. He is also chairman of the National Library. He was counsel for Ray Burke at the Flood tribunal.

Alan Gray is an economic consultant. Appointed at the peak of the lending frenzy in late 2006, he is head of Indecon International Economic Consulting Group, Chairman of London Economics and has previously served on the Boards of a number of commercial companies including the Irish and European Boards of Canada Life. Indecon does a lot of work for government, public bodies and internationally. Paddy Mullarkey, the Secretary General of the Department of Finance 1994-2000 is chair of Indecon and Donal O'Donoghue, “Indecon Advisor on Local Government”, was previously Galway County manager.

Deirdre Purcell, original member from 2003, is a novelist and a former member of the Council of the Credit Institutions' Ombudsman.

Tony Grimes, appointed in May 2008, is Director General of the Central Bank and Financial Services Authority where he has worked for most of his life. He also worked in the ESRI and with Davy Stockbrokers, once a subsidiary of Bank of Ireland.

Dermot Quigley, original member from 2003, was 42 years in the public service including 26 years in the Department of Finance where he was an assistant secretary. He became a Revenue Commissioner in 1990, before assuming the chair in 1998, and was on the board of FAS as one of the Dept of Finance’s two “watchdogs.” He also led a group reporting into public procurement in 2005.

Mary O’Dea is an executive director, Consumer Director, and has been on the board from the beginning. She briefly acted as CEO until the board was amalgamated into the Central Bank.

In addition, it should be noted that Matthew Elderfield, the new Head of Financial Supervision, was appointed recently. He takes up his position with the Central Bank in January, as IFSRA is re-merged with that Bank.
Back in 2005, the IFSRA board comprised Brian Patterson chairman, Patrick Neary CEO, Mary O’Dea Consumer Director, Alan Ashe, former Standard Life CEO, Friedhelm Danz; former meat processor, Dermot Quigley, former Revenue commissioner; novelist Deirdre Purcell; former boss of IBEC, John Dunne; FF linked barrister, Gerry Danaher, and Jim Farrell of the NTMA.

The three former IFSRA board members were:

Brian Patterson who was the Chairman of the Interim Authority. He was former Waterford Wedgwood chief executive, was also chief executive of the management training body IMI, and is a former chair of the Irish Times Trust. He was also appointed chair of Vodafone Ireland in 2007.

Liam O’Reilly was the first Chief Executive of the new financial services regulator, the interim Irish Financial Services Regulatory Authority, on 18 November 2002. Mr O’Reilly was Assistant Director General of the Central Bank of Ireland since 1998, and had been responsible for all of the Central Bank’s financial supervision functions. He was a Central Bank insider. Liam O'Reilly was subsequently appointed as a director of Merrill Lynch International Bank in 2007. This sparked some controversy due to what some perceived as potential for conflict of interest in his working for one of the companies he so recently acted as financial watchdog over. He also chairs the Chartered Accountants Regulatory Board in Ireland.

Friedhelm Danz was first put on the board of the Central Bank on February 1 1996, and then reappointed by Charlie McCreevey, in whose constituency he resides, until 2005. He had been a major beef processor and was a competitor of Larry Goodman's.

It was the IFSRA board that Patrick Neary reported to. It was the IFSRA board that Liam O’Reilly reported to until January 2006. It was this board that implemented the regulation of the Irish banks. It was this board that oversaw the “principles based” regulation system that allowed the banks to collapse and means that the taxpayer has had to pay out billions to the same banks.

In addition to the board, others who were indirectly responsible for the lack of regulation (influencing board appointments and attitudes to governance) were listed by the former Chairman Mr Brian Patterson, in the 2005 Annual report, as follows:

“Thanks are due to all those who work tirelessly to support our mandate:

• Ministers and civil servants, particularly in the Department of Finance.
• Members of the Authority who give of themselves tirelessly and often beyond the call of duty.
• Our management team under our newly appointed Chief Executive, Patrick Neary.
• A special word of thanks to our Chief Executive, Liam O'Reilly, who retired earlier this year and to whom we owe much.
• Our dedicated and professional staff.
• The Governor and staff of our sister organisation, the Central Bank - without whose support our task would be considerably more difficult".

He then said “Our role is to serve the public interest. It is that principle which guides all of our work and which motivates all of our people.”

But he also tellingly said the following –

“Ireland needs an efficient and competitive financial services industry - because it oils the wheels of the whole economy and is the repository of the country's savings. The industry needs to be competitive and profitable in order to underpin its stability - something we can easily take for granted.”

It was this thinking that impaired the Authority’s views of the prudent public interest. Unless corporate governance in Ireland is radically reformed, we are bound to repeat these mistakes.

Re-arranging the deck-chairs – the structure of the IFSRA within the Central Bank, with largely the same board in place, the same blinkered thinking in the Dept of Finance, in the same Government, will not help Ireland.

To date, the taxpayer has given €11,000 million to the Irish banks. The last Budget was a row about whether a mere €1,300 million was to be in cuts or taxes.

Paying the price of poor regulation in Banking

Anon:  Morgan Kelly’s UCD paper on the Irish Bubble reproduced here on 29th December is a chilling view of the kind of policies which nearly brought this economy down, and a warning that worse may yet come – much of it due to poor regulation. It is worth the effort to read it.

He found that it was “the increased supply of credit rather than improved fundamentals drove lending.” “All of these factors were present for Irish banks, and their impact was magnified by failures of regulation by the Central Bank and government. The rapid expansion of credit in the Irish economy and the consequent rise in property prices and construction activity represent systematic failures of control at all levels of the Irish economy.”

Kelly said that “In summary, the activities of the Irish banks remained extremely simple by international standards and could easily have been regulated, had the will to do so been present.”

He concluded that “Given the weak independence of the Irish Central Bank, (IFSRA, in fact) the will to control banks derived ultimately from government.”

The claims on systemic failure; at all levels of power in the economy; and the lack of will to regulate are correct. He does not say that all of these failures stemmed from the strong ideological economic hostility to regulation by the state.

It is worth exploring the governance and composition of IFSRA in this and a subsequent Blog. As Kelly pointed out, the government ultimately controlled the banks – all the appointments to these boards are made – carefully and politically - by government. The advice of the deeply conservative (albeit in this instance, not conservative at all) Department of Finance dominates too. It is clear that while some of the directors had a considerable knowledge of economics and/or finance, others had no such knowledge or skill and some may have been hostile to regulation.
The cost of the collapse of the Irish banking system is still unknown. The ultimate buck stopped, not with Patrick Neary, the CEO of the Irish Financial Services Regulator, nor his predecessor, Liam O’ Reilly, to 31 January 2006, but with the board to which he reported.
Much has been made of Patrick Neary, the inadequate and overpaid CEO of IFSRA, but the board he reported to remains largely in place. What links did they have to Fianna Fail/PDs? What influences were there on Mr McCreevy, Ms Harney and Mr Cowen in the selection of the board, in additional to the political?

At the time of IFSRA’s establishment in 2002, Siobhan Creaton, of the Irish Times commented very pertinently, that “The restructuring of the Central Bank has been a lengthy and controversial process and was finally agreed in a compromise between the Department of Finance and the Department of Enterprise, Trade and Employment.”

Creaton said, “The degree of complexity involved in tinkering with an organisation as fundamentally important to the Irish economy as the Central Bank has resulted in the creation of a complicated structure”.

But interestingly, she also said that “It has been described as unwieldy and unworkable by observers in the financial services industry and politicians, with Fine Gael finance spokesman, Mr Jim Mitchell, pledging to seek a more streamlined organisation if his party gets into Government in the months ahead.”

What if the late Mr Mitchell’s Fine Gael/Labour had attained power in that general election? Would a new government have meant real change as IFSRA, in the system of regulation, in attitudes to enforcement, in the state’s attitudes and dealings with builders, speculators and other creditors? Would Ireland today not be facing such gigantic financial problems and almost facing bankruptcy if NAMA does not deliver, as Morgan and others believe that it wont/cant?

Why did all the key people in and around financial regulation fail Ireland so badly?

The reason was because of the over-riding philosophy by so many people in powerful positions who really, sincerely believed in the workings of markets. Many of these people were not very tolerant of differing views. Most in the media promoted the view that markets worked best when left largely un-regulated and were totally “free” - of interference.

There has been much questioning and debate on the profound ill-effects of this economic ideology in the UK, France Germany and even in the US. But little here in Ireland – even now. The view that this is a recession, a temporary downturn and it will be back to business as usual soon, may cost us, yet.

IFSRA set out its philosophy clearly in its annual report in 2006:
“We adopt a principles led approach to supervision.”

What this means is that “the Board of Directors of a financial service provider are responsible for setting their tolerance for risk and for ensuring that management establishes a framework for assessing the various risks.” [The banks - Not IFSRA]

“Financial service providers are also required to develop a system to relate risk to their level of capital and establish a method for monitoring compliance with internal policies.” [The banks - Not IFSRA]

“Our role [only] involves oversight of the quality of the institution's corporate governance including risk management and internal control systems, the focus being on structures and methodologies used.”
In December 2005, Brian Patterson, chairman of the financial regulator, announced the appointment of Patrick Neary as CEO of the regulator. Patterson claimed that “Mr Neary had played a central role in the shape and direction of the financial regulator since its establishment. "Pat is ideally suited to take the financial regulator through the next phase of its development.”.
Mr Neary was the unanimous choice of the selection panel, which was made up of non-executive members of the authority and an international regulatory expert from Finland.
It is of interest that the Irish Times reported that Mr Neary's appointment was welcomed by Financial Services Ireland, a trade association for the financial services sector, affiliated to the Irish Business Employers Confederation, which said “tackling the cost of regulation should be top of Mr Neary's agenda.”
IBEC did not want better regulation – it wanted lower cost of regulation…………! Ironically they had a case. Its members were paying most of the cost - for no effective regulation of finance.
In 2006, the staff was 350 and the cost including consultancies etc., was €49m. There is now 400 staff. The cost today is €63.6m of which €34.4m is raised from the industry plus a subsidy of €29.2m, given by the Central Bank, which makes up for the shortfall from the credit union sector and some other areas.
The composition of the IFSRA board will be examined in a second part of this Blog.

Ireland seeks Hedge Funds

Nat O'Connor: A article in the Financial Times states that the Government is seeking to attract hedge funds to Ireland.

Dublin to open door for hedge funds (19 December 2009): "The Irish government has passed legislation to make it easier for hedge funds based in the Cayman Islands and other tax havens to move to Dublin."

The new legislation reportedly "cuts red tape to a minimum" in terms of moving companies to Ireland.

The Minister for Finance is quoted as saying that the finance bill early next year to will "strengthen Ireland's competitive edge in this important sector".

Howver, the FT states that many investors are looking for hedge funds to be more tightly regulated. Billy Kelleher, Minister of State for Trade and Commerce, is quoted as saying that "Funds are looking for stronger oversight, and better regulation, and we believe Ireland has that in spades."

Patrick Honohan, Governor of the Central Bank in a speech (1 Dec 2009) has written that "I will certainly not allow Ireland to become a soft option for firms or activities that are no longer welcome elsewhere."

However, Honohan concludes "the primary onus for sound operation must fall on the directors and management of the banks themselves. They must renew and reform their business models and culture to ensure that a recurrence of such a collapse becomes unthinkable. As has been suggested by one former regulator abroad, a watchword for supervisors in the new era must be: trust less, verify more."

How is this different from what has gone before? Is Irish banking regulation really tightening up? And can it be tight enough (and expert enough) to regulate an influx of hedge funds?

Germans call for Tobin Tax

Paul Sweeney: The two earlier contributions on Progressive Economy on 27th and 30th August, were spot on in showing a growing trend, ignored by the Irish media. On Friday 12 Sept, the German Finance Minister called for a global tax on financial transactions in a effort to end “binge-drinking” on capital markets. Peer Steinbrueck, a critic of Ireland’s leading role in beggar-thy-neighbour corporate tax competition policy in the EU, said the revenue would pay for the cost to taxpayers of bailing out the banks, including fiscal stimuli.

He says “the cost of the crisis should not be borne alone by small taxpayers.” The Irish Government, our corporate elite and their professional storm troopers – financial sector economists, accountants and lawyers - should take note.

He would like a tax of 0.005% on all financial transaction of banks, insurance companies and investment funds. Steinbrueck’s call follows on from a similar call by the Chair of the UK’s Financial Services Authority, Lord Turner, to introduce such a tax.

The Chancellor, Steinbrueck’s boss, conservative Angela Merkel, said she would discuss the idea, but it had close to no chance of being agreed at the G20 summit in Pittsburgh on 24th and 25th September.

Why is the Irish media not covering this interesting debate? Could it possibly be that it is generally opposed by conservatives as an interference in the market? And is anybody in power here interested in this idea?

Interestingly, Poul Rasmussen - who was in Dublin over the weekend - is the architect of the EU’s plans for regulation of financial services in Europe. The former PM of Denmark, an economist of some note and leader of the PES, was fresh from addressing the leaders of the UK's financial services. The meeting in the Guildhall, in the heart of the City, was a fierce affair. The big boys in finance don’t want regulation and were harshly critical of Poul Rasmussen’s proposals. While agreeing to more consultation, he would not back down on the need for greater regulation of hedge funds and private equity and the financial sector in general.
More interference in the market!

And even more market interference may be threatened by Obama this week. In his speech on Wednesday last, he said “our predecessors understood that government could not and should not solve every problem,” but “they understood that the danger of too much government is matched by the perils of too little: that without the leavening hand of wise policy, markets can crash, monopolies can stifle competition, the vulnerable can be exploited.”

Meanwhile, in the UK ...

Following last week's debate in the UK surrounding a Tobin Tax, Ruth Sunderland - writing in today's Observer, has a few other suggestions for putting manners on the UK financial system, including an updated version of the US Glass-Steagall Act, enacted during the Depression and rescinded by former President Bill Clinton. You can read her full piece here.

Is the end of the recession nigh?

Paul Sweeney: Is the recession beginning to end? It is far too soon to say. It has been the worst recession in living memory, and Ireland is one of the worst economic performers, with the economy shrinking by a staggering 10.3% in 2009. Compare this to the Euro area of – 4.4%, UK 3.7%, US -2.7%, France at -2.9%. Then there are the other very poor performers, with Germany at -6% and Russian at -5%.

Over east, Japan is shrinking by -6.1%, while Singapore is registering an even bigger fall in GDP of -6.8%. Korea is at -5%, and Thailand at -4.5%. The Celtic Tiger is falling with the new and the old Asian Tigers!

The very few economies which are growing include China at (a now reduced) +7.2%, India at +5.5%, Indonesia at +2.5%, Pakistan at +1.3% and Egypt at +4%. Virtually every other economy in the world is shrinking in size this year. For 2010, forecasts are more optimistic, with growth in the vast majority of economies, albeit low growth. This excludes Ireland in 2010.

Conventional wisdom among economists is that large falls in growth mean the recession will be long, and that when the recovery happens, it will be slow. Yet the economist Paul Ormerod argues “very few recessions last longer than two years. And most recoveries, once they start, are strong.” He argues that that, as late as the autumn of 2008, economic forecasters in general were far too optimistic about 2009. He asks: are these same forecasters now too pessimistic about recovery? He argues that “the historical evidence reveals a typical pattern of recession and recovery that suggests this may be so.”

Ormerod says that “since the late 19th century, there have been 255 recessions in western economies. Of these, 164 have lasted just one year and only 32 have lasted for more than two years. In other words, two-thirds of recessions last a single year, and only one in eight lasts more than two years. If we strip out the peculiar circumstances at the end of the two world wars, 70 per cent of all recessions last just one year.” He also says that the “pattern of duration is virtually identical regardless of the size of the initial shock.” He says that even with a fall in growth of 6 per cent, 70 per cent of recessions have lasted just one year.
Ormerod, who is author of Why Most Things Fail and the Death of Economics (a critique of orthodox economics), says that recovery was rapid even after the Great Depression, and he argues that it will be again this time because “capitalism seems to be a very resilient beast”.

However, he is probably optimistic, as are the economic forecasters arguing for the rapid turnaround and resumption of growth next year. This recession is very different from previous ones, especially the Great Depression. With globalisation, the world is greatly interlinked, as the negative growth figures almost everywhere demonstrate. This is a really synchronised recession. Few countries are importing so much that they can pull out other countries with export growth (a line argued in Ireland by the Wages Cuts Chorus who equate wage cuts with increased competitiveness!). Secondly, this recession differs in that it was caused by the collapse of what was, in essence, a corrupt and poorly supervised financial sector. This sector had come to dominate the more productive economy, with the approval of governments.

So this recession, generated by the deep Financial Crisis (remember it was initially called the “Credit Crunch” by journalists and apologists), and which is globally synchronised, will be particularly difficult to arise from. But in the meantime, we hope that Ormerod may be right.

The financial crisis is on the way to be solved. Stock markets are recovering, the taxpayer is bailing out the banks (and builders, in Ireland), liquidity is returning slowly to markets, and the extreme uncertainty in markets has ended. The state rescued the (self-regulating!) market. The OECD and IMF are revising upwards their projections for the first time in a couple of years.

So we probably have passed the turning point, the absolute bottom. But we are a long way from recovery, from the emergence of the “Green Shoots”. In Ireland, our bankers, builders, government, and the so-called financial regulator screwed up particularly badly, ill-advised or not advised by most economists. We really ruined a very prolonged boom with a deep bust, which could have been so much less than a fall of 14%+ in GDP from peak to trough. It will be late 2010 before the shoots even begin to arise here. In the meantime, unemployment will rise and will take time to shift down again.

An expanded comment: Paul Sweeney on Sean O Riain

Paul Sweeney: This is a thoughtful commentary on the banking crisis and what might transpire after it. At present as Sean O’Riain says, there is little serious debate on how we might, as a country, make the best out of this crisis, by radically addressing policy deficiencies especially around encouraging indigenous industry and services.

I was struck buy the third point made by Sean on state support for developing industry and services. Well, we can all say this till we are blue in the face and do things really change? For example, here is a similar comment in the final paragraph of the submission by TASC to the Industrial Policy Group, chaired by Mr O’Driscoll, way back in the heart of the boom – in October 2003:

The encouragement of FDI through low corporate profit tax rates has clearly been an important factor in Ireland’s recent economic success. However, it would be a mistake to continue to rely on this policy to the same extent in the future. Specific focus on high value added, innovative enterprises must be the mainstay of industrial policy. This includes both R&D and non-R&D innovation. How can we attract (from abroad) and encourage (from within) innovative firms? An innovation-rich environment, with universities, research institutes, state agencies all providing support, skills and knowledge, is essential. A sustained policy of investment in research is fundamental to this. In addition, quality of life issues, including housing, transport and culture, are essential to attract and keep the highly mobile qualified labour that will undertake the research and implement the innovations.

It is also worth quoting another paragraph from that same submission made a long 6 years ago! This focused on “Irish banks” DEFPA, which is now part of Hypo and collapsed gloriously.

“Among the downsides of the low tax policy is that, in order to conform to EU regulation, Ireland has had to apply this (low tax) policy across the board. This has made it impossible to adopt a strategically selective policy in relation to corporate tax rates. It has also reduced the revenue from indigenous firms’ tax payments. Moreover, the very success of the low tax policy in some instances, for example the IFSC, has engendered intense criticism from such significant European partners as Germany. This is not surprising, seeing as the single largest block of funds managed at the IFSC is from Germany. It cannot have escaped the attention of the German Finance ministry that the largest bank in Ireland (DEPFA bank) is in effect a German bank which, although its main operation is in Germany, has its ‘headquarters’ in the IFSC".

During TASC’s oral submission, made by Jim Stewart and myself, I pointed out the myriad of subsidies to property investors in tax breaks and warned of the likely (!) property bubble bursting. One of the members, who knew me, said that I had been saying that there was a property bubble for two years. I reiterated that there was a bubble and that it was state inflated with pro-cyclical tax cutting policies and subsidies.

On Sean’s fifth point on regulation reform, don’t hold your breath. The defenders of the status quo are already out in force against reform, in the Business pages of the Irish Times. My good colleague Pat McArdle wrote a stirring piece against rules based regulatory reform in the weekly Economics section, last Friday, arguing that all we need to do is implement existing regulation. He has a point, but would enforcement be adequate? He, like many in finance, are against enforceable “rules based” regulation favouring the supposed alternative of very light (so light it is often non-existent) principles based regulation. In a rules-based system, the state and regulators prescribe in some detail what companies must and must not do to meet their obligations to shareholders, clients and us suckers – the taxpayers, who bail ‘em out! In the principles-based systems, regulators worry less about details, and instead look at companies’ behavior according to broad principles. The U.K.’s Financial Services Authority has eleven such principles, which are often deliberately vague. For example “A firm must observe proper standards of market conduct.” We know where that got banking!

Pat is the economist with Ulster Bank and a member of the Financial Services Consultative Industry Panel. By pure coincidence, the Chairman of that august body, David Went, (formerly CEO of IL&P who built the former state Assurance company up with that takeover of Irish Permanent) was quoted in the business pages of the same Irish Times, the following day, as saying we must avoid “a one size fits all” approach of bank regulation. (I should say that I had a piece in the main pages of the Irish Times a few weeks earlier arguing for the radical reform of corporate governance and regulation). Mr Went again raised the issue of rules based or principles based regulation, while not apparently taking sides. But he was firmly against nationalisation of the banks as it would not be “good for the industry”!

But, in a 2005 submission to the Dept of Finance, the Panel said “The Industry Panel believes that enabling, principles-based primary legislation, combined with an appropriate process/structure operating under the aegis of the Department of Finance at the “newly constituted” secondary level, would be a more effective option”. This body is an advisor to the failed Financial Services Regulator, perhaps the costliest public sector failure ever in modern Irish history. It appears to be dominated by the same guys who captured the Regulator! In fact, the panel was described as "industry insiders" by Labour Finance spokesperson Joan Burton TD, who called for the panel to be scrapped as part of an overhaul of the system.

Banking Reform

Sean O Riain: Once we have banks that have been re-capitalised and apparently stable once more, where does our financial system go? In negative terms, how can we be assured that the financial system will not generate crises on the kind of scale that we are currently living through? In positive terms, how can we increase the chances that finance flows toward productive rather than speculative uses?

These critical questions are largely sidelined in the current debates on nationalization, which have focused largely on the (urgent and very important) questions of how to restore the stability of the banking system and who will end up stuck with the bill. But, even if this is achieved at the least possible cost to the taxpayer (and therefore with the least possible constraint on public investment into the future), this still leaves the questions of stability and productive investment. There is little reason to suppose that an unreconstructed banking system will deliver this on its own – the banking system provided neither stability nor productive investment before this crisis. Reform of banks themselves will be essential, although this has largely disappeared off the agenda in recent months.

There are five areas through which we can influence how banking practices are shaped by the wider system of financial governance (some of these are usefully reviewed in Stiglitz and Uy’s account of the ‘East Asian Miracle’). In each area, the system has left a great deal to be desired and requires reform.

First, we can change investment incentives. When capital gains tax was cut to 20% in 1998, capital flowed into the economy. But as is well known, the vast bulk of that capital went straight into property and, to a lesser extent, financial speculation. Even if capital gains had been reduced selectively, the gains from investment could have been channeled into more productive areas like R&D. As it was, the exceptionally low tax rate combined with various schemes promoting property investments channeled financing away from high tech and other export sectors just when many of them needed that financing most to build international scale operations. There are glimmers of hope in recent government documents of a recognition for the need for a re-design of the incentives for investment, with talk of supports for R&D and education. There are also depressing signs of a strong persistence of business as usual – many millions to go into banking with little reform attached, six million in subsidized pension loans to go into construction, while a one billion euro plan to protect jobs and boost skills proves difficult to approve.

Second, we can regulate the provision of private sector credit. Government plays a crucial role in providing a framework that promotes liquidity in credit markets. However, it is also clear that government must be involved in ensuring that this liquidity maintains a link to the real economy. This does not require that strict capital controls or similar measures necessarily be imposed but it does require a managing of the openness to the more loosely regulated parts of financial markets. Rules about capital requirements, about particular kinds of financial instruments, about dubious transnational capital flows, and about reporting standards will be necessary components, among others.

This is also a matter of the regulator providing a counter-balance to the ‘social milieu’ and analytical models of financial analysts that produced a massive discounting of the risks of the financialised economy. Regulators must provide the institutionalized prudence that can control the ‘irrational exuberance’ of financial markets.

Third, there is an urgent need for an enhanced role for the state in channeling credit to business. It has already been playing a central role in that respect. The state agencies have been a significant funding agency for high tech firms, have led the building of a venture capital industry and have made effective investments. On the other hand, these investments fall well behind the scale of the investments in promising firms made by other countries – including the apparently ‘non-interventionist’ US where an increasing number of the best technological innovations come from federal labs, federally funded R&D and networks of firms supported through government schemes (Block and Keller, 2008). As Iona Technologies founder Chris Horn argued in the Irish Times recently, these kinds of supports need to be extended significantly (with all the safeguards that are by now well developed in Enterprise Ireland and elsewhere). In short, we don’t have to invent a public industrial development bank – we have one already in place that needs much greater funding and political support.

Fourth, we need to transform the organisational culture and capabilities of banks. One of the most remarkable elements of the banking crisis is what it has revealed to public scrutiny about the internal culture and capabilities of the banks. The banks have simply got a very weak capability as organizations to make productive investments. For many years now, the only serious investment options they offered to private citizens was the savings account or buying property abroad. There may well be some human capital problems with temporary nationalisation – but there is certainly an issue with the skills and practices inside the banks themselves.

A temporary nationalization of the banking system will not in and of itself transform this culture and capabilities but it offers an opportunity to do so. The recent ‘swap’ of expertise between Enterprise Ireland and the banks suggests precisely such an effort – but the resistance by government to nationalization suggests a lack of a broader willingness to take on this issue. Indeed, it will most likely take a sustained effort to do so since the partial zombification of the banks at present is hardly conducive to organizational re-invigoration. A period of nationalization should result in organizational restructuring as well as financial stabilization.

The fifth area of reform is the area of regulation itself. If the state must play an enhanced role in governing finance, then the question of how the regulatory system itself is organized is crucial. The model of regulatory independence has been shown to be flawed. Many serious questions have been raised about the Financial Regulator and many of the solutions proposed have focused on the kinds of people to be recruited to lead the agency. However, more serious changes are required. The insulation of the ‘independent’ regulator from the broader democratic system appears only to have encouraged ‘regulatory capture’ by industry interests as the regulator operated outside the view of the democratic system.

The regulator needs to be able to engage with the industry and MIT research has shown that conversations between industry and regulators has been an important source of learning for technology firms in the US (Lester and Piore, 2004). But there needs to be a counter-weight against the pressures of capture that are generated through these dialogues between regulator and regulated. Putting increased pressures of external accountability on the Financial Regulator would guard against the kind of apparent ‘capture’ that have occurred in recent years.

A much stronger role for the committees of Dáil Éireann in reviewing the financial sector on an ongoing basis would provide such a forum. Protection for auditors and whistleblowers would also seem essential, given the pressures that were evidently put on auditors in the recent past. Ironically, they would therefore allow the Regulator to engage in properly advising the banks, knowing that these stronger structures of external accountability were in place. Greater democratic accountability will only strengthen the capacities of the regulator to monitor developments in the sector.

One of the effects of the current crisis has been to push issues of economic governance and policy into the public sphere. Much more complex public discussions regarding the economy and financial sectors have taken place in recent months than over the past decades. This serves to show up the weakness of our ‘economic democracy’ in normal times. Governing our financial system to provide stability and productive investment and democratizing our structures of regulation will be essential elements in enhancing both our economic and political life. We should not let debates over NAMA, important though they are, distract us from these vital regulatory issues.