On Wednesday morning, David debated with Dan Mc Laughlin Chief Economist of Bank of Ireland on the near-term outlook for Ireland. The debate was hosted by Bank of Ireland business banking and the were 200 odd punters there which is quite impressive at 7.15 in the morning. David even offered his house for sale!
Click below to hear the row.

David’s speech only:

Runtime: 28mins 9s, Size: 13.2MB, listen here.

Full event: Intro, Dan McLaughlin, David & Questions from the floor

Runtime: 1hr 24mins 42s, Size: 34.7MB, listen here.

Session Transcript

Moore McDowell:
Thank you, Frank, and ladies and gentlemen. It is a pleasure to be here, taking the chair in this seminar. When Frank and Des Hanrahan asked me a couple of weeks ago if I would do this, I had just been watching a video of a movie called, “The Cinderella Man.” You remember “The Cinderella Man?” It’s about an Irish boxer in America, Jimmy Braddock, or something like that, who takes on Max Baer in the middle 1930s and whips his ass against all the odds. And I thought, well, if you remember the fight scene, the ref got a hard time. The thought of being between this pair of bruisers like the ref in “The Cinderella Man” is something filled with trepidation. I’m not sure which of these fits best the Russell Crowe role I’ll let you be the judge of that and which will be the battling bruiser who is going to lose.

I hardly need to introduce them to you, but I will in a second. I have to say this: a prediction in economics is the most dangerous game in the world, unless, of course, you happen to be an historian under the Soviet system and where it was much more difficult not to predict the future but to predict the past, because if you got the past wrong, you tended to end up in Siberia. Nobody does that to economists today. They simply shake their heads and go, “Well, here he goes again. There’s McDowell, the fellow who successfully predicted eight of the last two recessions.”

So we have here and I’m going to call them “these bruisers” people from the opposite end of the spectrum in terms of economics. Dan McLoughlin, who is a chief economist at Bank of Ireland, is obviously known to all the Bank of Ireland people here but he’s obviously known to other people outside the Bank for his commentaries. Economists are known as “dismal science professionals,” and I have to say I don’t know what Dan is doing in there because if there ever was the perennial optimist about the economy, it’s our Dan, of whom it was said unkindly about two or three years ago at the Kenmare Conference that Dan has never seen a statistic that he didn’t like.

And on the other hand, on my right as I sit looking at you, the left on the other hand although that’s probably not the right place to put him we have Dave MacWilliams, who you’d probably be surprised to hear is a trained economist. Worked for the Central Bank, worked for the private sector and, he told me this morning, did a spell learning Russian. Dave, in addition to being a trained economist, is remarkable. He’s a sort of Renaissance Man, because he’s recently published a very learned treatise on the family life of the Renaissance papacy, which I gather is a best seller. I haven’t read it myself. You know, economists get everywhere.

Anyway, what I really want to say before I hand over to them, is that this business of predicting is a seriously difficult business. Five years out I think they are very brave when they say this is what it is going to look like although maybe they’re going to hedge it. I think if you can predict six months ahead and do it accurately you are doing fairly well. After that you are giving hostages to fortune and you are getting people saying you are predicting eight times the next recession.

So I’m going to leave it at that for the time being. I’m going to tell them when time is up, I’ll make a few comments on them, and then I’m going to chair the question and answer session and I will say a few words at the end.

So first of all I’m going to call either Max Baer or Russell Crowe depending on their point of view. Dan McLaughlin.


Dan McLaughlin:
Thank you Moore for that. Welcome everybody, thanks for coming along. I’m going to start out by just having a look at where I think the economy is going in 2012, over five years.

Some things we’re fairly sure are going to happen. United will still be dominant in world football, Christiano Renaldo will be the number one player in the world. But other things are more difficult.

The economy, we were just joking beforehand, there was an article in the Irish Times over Christmas about the economy and the first lines were “The Cassandras have been proven wrong again.” And it struck me that the only real Cassandras are the Irish times writing about the Irish economy.

Because if you look around, a lot of economists are pretty upbeat about the next couple of years, which might be a worrying sign in itself. But I think the consensus is that for 07, particularly, it will be a very strong year.

Further out people differ, and in my presentation I’m going to cover some of those issues.

As was said by Frank at the start, when we have quite an extraordinary performance over the last 15 years or so and the charts that you can see in front of you, just trust to put that into some kind of contact. It’s Ireland’s income per head relative to the EU 15. So that’s 100. So when we joined the EU back in 1973 we were a relatively poor country in Western Europe. We had an income per head of about 2/3rds of the European norm.

And the 70s and 80s we didn’t make much progress. But in the 90s as we all know now, around probably 93, 94 the economy started to take off. And suddenly from 94 to say, 2000 economy grew in real terms every year on average by about 5%. It’s quite an extraordinary performance. And of course even two or three years into that a lot of people were saying it’s not sustainable, something will go wrong. And of course, it did prove to be sustainable.

And even in the past five years, although we have moved to a lower job trajectory, I will argue that our potential growth is around 5‑6% right now. But obviously that is still significantly higher than the rest of Europe. So consequently even in the last five years we’ve outstripped everybody else. And now we are statistically the second highest income economy in Europe behind Luxembourg which is an odd economy because a lot of people work in Luxembourg and live in France, so if you divide the GDP per head you get a very, very high number.

But we’re now about 40% higher than the European norm. So Ireland has gone from being one of the lowest income countries in Europe about 20 years ago, 25 years ago to now effectively the highest income economy in Europe.

And I think when we talk about the Celtic Tiger, people have different views as to why it happened, what does it mean, what some people are left behind, all those kinds of arguments. But to me this chart in front of us to me, I think sums up the whole transformation of this economy.

Employment in this country has doubled in about the last 15 years from one million people to two million people. And that transforms everything. It transforms our own industry, the banking sector, because suddenly people have incomes and can afford to borrow. You suddenly, the bad debts that you’re seeing will be significantly lower. It transforms the tax system. Effectively, if you double the tax base, then each one of us can pay a lower average tax rate. And that’s all in a sense what’s happened in the last 10‑15 years.

What the Celtic Tiger to me has meant a dramatic transformation in our labour market and it’s twice as many people working and that transforms the whole economy. Two million working, as I’ve said, and we’ve gone from a massive unemployment society, where if you go back to the 70s and 80s, what we had an awful lot of was labour, but we didn’t have any was capital. That equation has completely turned around now. We have a massive amount of capital in terms of you can borrow endless amounts, but where the shortage is now, paradoxically, labour.

The other transformation that’s occurred is quite an extraordinary change in the people who are actually borrowing money. We’re all familiar with the notion and it’s a bit of a moral panic in the media that people are borrowing loads of money. But what I think is interesting, and I’ve put this chart up to try and capture it, is that all that’s happened to me in the last 15 years is that the state where massive borrowers of money. The state now has repaid a huge amount of our national debt, and all we’re seeing now is that individuals are borrowing as opposed to the state.

And when I talk about people, younger people don’t even, the phrase that older people would have been familiar with in the 80s was the national debt. It was a big issue; the national debt is over 100% of GDP. If you said the national debt’ now to somebody who is under 20, they probably wouldn’t know what you meant. You never hear the term at all. And in those days the national debt was the big issue because the government was borrowing huge amounts of money and on the chart up in front of you, if you go back to 1990, the national debt that taxpayers owe was over 80% of our GDP.

Personal debt was tiny. Real interest rates were very high, we had massive unemployment, banks were reluctant to lend big money because they were afraid they wouldn’t get it back, people weren’t looking to borrow because real interest rates were so high. So what’s happened in the last 15 years is interesting, to me, because the Celtic Tiger changed the employment situation, we ended up with the government running substantial purchase surpluses running down the absolute debt that the government owed. So consequently, now, our national debt is less than 25% of GDP. And all that’s happened is, to me, is that individuals have stepped into the bridge. So personal debt has risen very significantly.

But if you put the two together, curiously enough, as I have on the chart, the national debt plus individual house loans is actually less than it was 15 years ago. So in the sense it’s a very healthy thing that the taxpayer has now a smaller burden into the future, and individuals have taken up that slack and have increased their borrowing.

As a consequence, what they’ve done with most of the borrowing is divide assets. And again it’s a curious thing to me that the media treat individuals and entrepreneurs quite differently. We’re all familiar with guys like Desmond, like Dennis O’Brien. Everyone looks at emphasis put on their assets. They’ve obviously got, presumably a lot of them have, huge borrowings. But you never see that. Yet, in an individual context, everyone influences the liabilities of people. The fact that we owe a $120 billion mortgage debt. But what have we done with a $120 mortgage debt? We’ve bought assets which have risen dramatically in price. So this chart which is taken from Central Bank data shows you that over the past fifteen years, on a household basis, not only has our income risen significantly, but also our wealth has risen significantly because most of the borrowings that we’ve done have been secured and those have been secured on assets which have risen significantly in price. So the chart shows you that at the end of 2005, Irish households had a net value of over 600 billion. So not only are people very high‑income, but for the first time you have a generation that’s now going to be inheriting wealth. A lot of people owning property, which has obviously risen significantly in value, passing that on to a next generation.

Where I think there is less emphasis put on, and I personally think it’s a key issue for the economy‑‑we’re a high‑income economy with relatively high household wealth, but where we are very poor is the level of public infrastructure. And this chart shows you the public capital stock as a percentage of GDP. And in Ireland it’s extremely low. And similarly, despite the huge amount of investment in housing, the actual amount of houses in Ireland, divided by population, is about 400 per thousand. The chart shows you that in countries like France it’s near 500 per thousand.

So, we have a relatively low level of housing stock, and we have a relatively poor level of public infrastructure. Now, why is that? And the answer is, the 1980s was an awful decade. It was a loss decade for this country. Because‑‑what I’ve done on the chart is show you exchequer capital spending as a percentage of GDP. In the early 80s, the government was spending about ten percent of capital income on capital spending. By the end of the 80s, it was spending three percent of GDP. We’re now up to about five.

So, the 80s saw virtually no investment in our infrastructure, with the consequence that we’re paying for it now. And of course there’s a huge amount of resources given to it, but we’re just catching up with something that was depleted very significantly.

The other thing which is given less attention‑‑you go back to the late 70s, there was thirty thousand houses a year built. By the end of the 1980s, there was about sixteen thousand houses built. So both in terms of the investment in housing and the investment in public infrastructure, the 80s was a disaster which we’re all paying for. And it’s the easiest thing on the earth for governments to postpone capital spending‑‑the hardest thing is to cut current spending, so the easiest political thing is to postpone capital spending.

So my thesis is simple: we’re a high‑income economy, we have a massive amount of underinvestment, both in the public infrastructure and in our housing stock. So the next five, ten, fifteen, twenty years, we’ll see massive sustained investment in those areas, which will transform the economy in terms of the capital stock and the housing stock. And it’s not going to take five years; it’s going to take a generation, at least, because of the damage done in this period.

Okay‑‑will we have an economy that will generate the kind of income that will allow us to do that? And the answer, to me, is yes, most likely, because first of all we have‑‑people are familiar with the kind of demographic story we have, which is quite different from the rest of the EU. People have been generally aware that a lot of EU countries are facing falling populations. I’ve put on this chart just a snapshot of the Irish population change over the last fifty years or so. You even go back to 1995‑‑the migration in this country was broadly flat. You go back to the late 1980s, you know, a lot of apologists for the economy in the 80s. But the single starkest statistic to me is in 1989, a net fifty thousand people left this country. Net fifty thousand. So people voted with their feet. Now they’re voting with their feet to come in. They don’t want to go to Sweden, which is held up as something we should aspire to, which is an open labour market. Virtually nobody’s gone to Sweden. They’re coming here and they’re coming to the UK because it’s a relatively free labour market. It’s relatively low direct tax regime. And that’s what’s actually attracted people to come here. So consequently we’re now in a situation whereby we’re at full employment, we have an open labour market, and all of the immigration is predominately demand‑led.

So, to me, if you look at our potential growth rate in the next five years, it’s still extremely high. Your potential growth rate is the product of two things: how productive each worker is and how much the labour force is growing. In Europe the potential growth rate is about two percent. In Ireland our potential growth rate, in my view, is about five‑and‑a‑half percent‑‑something like that. Why is it so high? First of all, because our productivity is much higher than the European norm, primarily because we have a relatively high percentage of our GDP in manufacturing. And secondly, that manufacturing is relatively high value‑added. The curse of the Irish economy in the 70s and 80s was that we didn’t have any old‑style manufacturing to sustain employment. The blessing of the Irish economy in the last fifteen years is we don’t have to manage the run‑down of Ireland steel, car production, shipbuilding, coal mining, those kind of industries, which the rest of Western Europe has tried to manage the decay of. So our productivity is relatively high.

And secondly, and more importantly, labour force growth is extremely high. Why is it high? It’s high because we still have a relatively young population so there’s a significant natural increase. A lot more female participation in the workforce, which is still growing. But thirdly and most importantly is migration. We have a full‑employment economy. EU unemployment is significantly higher. We have a reservoir of unemployed people that we can tap into, which is boosting our potential growth. So, to me, over the next five years, the economy’s potential growth rate is likely to be five, five‑and‑a‑half percent, which compares with two percent in the rest of the EU.

Okay, that’s our potential growth rate. Will we grow at that? There’ll be cycles, we get downturns. We got a downturn in 2003, where we had a period of sub‑trend growth. We’ll have periods where we’ll recover that lost output and grow slightly above trend. But are there things that could happen to squash demand in the economy where it won’t meet the supply potential? And the answer is, to me, that’s very unlikely because there are three things that mainly affect demand. Firstly, the exchange rate. Who’s our main trading partner? The UK. What’s happened to the Euro‑Sterling exchange rate in the last three years? It’s moved between 66 and 70p. Britain has joined the Euro to all intents and purposes. Extremely stable. Keeps its own interest rate sovereignty. But the exchange rate is remarkably stable. So, from our perspective, an ideal scenario.

Secondly, interest rates. Go back to the 70s or particularly the 80s, we were talking about an interest rate that was killing the economy, both in terms of high nominal interest rates and high real interest rates. Since we’ve joined the Euro, monetary regime shift, we’ve ended up with an interest rate which is lower than, really, if we’d had our own central bank, that the central bank would have imposed on us. So, yes, interest rates can go up and down. Yes, they are going up. They’re currently at three and a half percent, they’ll probably go to three seventy five, possibly even four percent. But for an economy growing as quickly as we are, that’s unlikely to damage the economy in any fundamental way.

And finally, fiscal policy. Is there anything that will lead to the government having to raise the tax burden significantly? In fact right now the opposite is true. At the end of 2006 Irish tax receipts exceeded day to day spending by 9.1 billion. 9.1 billion. The government has underspent for the past five years. The current tax system is generating income the government can’t spend. If you’re running a company and you were doing that you would give it back to the shareholders. We are using the massive surpluses on the current budget to run down our national debt which, as I said, now is actually the lowest in the Western world as a percentage of GDP. Secondly, we are using it to fund capital spent. The real debate we should have in budget time is is that a sensible thing to do. If we were running a British style fiscal policy, their policy is to balance the current budget. We have a nine billion current budget surplus, so the notion that fiscal policy is tight or loose is ridiculous. We have current tax system generates a huge amount of surplus that the government cannot spend. So, to me, demand is unlikely to be too low in five years.

So what’s the economy going to look like? I think if in 2006 our GDP is 176 billion, in 2012 it will 280 billion. Our per capita income will be 56 percent higher than the EU norm, it’s currently about 40 percent, and we’re currently spending about 75 billion a year in consumer. In 2012 we’ll be spending about 130 billion a year.

What does it all mean for asset prices, finally? We have had a dramatic increase in house prices of course over the last 15 years. Also if you look at house prices relative to income it’s interesting as well because if you go back to the 70s and 80s we moved in a four to five percent range. House prices are now basically double that. So what has happened in that period? I think very simply, number one, we’ve had a shift of monetary regime. There has never been a situation in the modern world, in a peacetime environment where one country has swapped it’s monetary unit like what has happened for the Euro. Consequently Ireland has swapped a high real interest rate economy and obtained a low real interest rate economy. If you looked at a textbook and said ‘what would happen to asset prices if that were to happen today?’ I’d say asset prices would go up. Banks have adjusted to that, and they used to lend two and a half times income. Why would you lend two and a half times income with interest rates at three percent, when you were lending two and a half times income when interest rates were 15 percent? So you’re obviously going to lend more relative to income. Those factors have contributed to an adjustment upwards of asset prices relative to income. Now I believe that our process is probably maturing. So I do believe that over the next five years or so we’re unlikely to see the kind of double digit rises in asset prices that we’ve seen. Because I do believe that now we’re at levels where we’re more likely to see asset prices and house prices move much more in line with income for a number of years.

If you look at commercial property what I find strange always about the analysis of house prices is that people say, “Look at property yields, they’re extremely low. At some stage they’re going to mean reverse, and they’ll go back to long run average.” That may or may not be true, but it’ll only happen if bond yields go back to long run average. So right now the Irish government can borrow for 10 years at under four percent, at three seventy five. The risk‑free rate of return is much, much lower than it used to be. So consequently, if the risk‑free rate of return is three and a half to four percent, commercial property yielding seven percent is ludicrously cheap, and won’t be there forever. So all that’s happened to me across Europe, in the last five years, is that property yields of commercial property have adjusted downwards in line with the fall in bond yields. That process is probably not quite finished but, again, we’re getting to levels where yields are adjusting downwards to this new low inflation global environment.

So the final point is: what’s it going to look like in 2012? To me, we’re still likely to see nominal house price increases per annum, but instead of the kind of double digit experience we saw in the 90s and first half of this decade, I think the likely scenario is that we’ll get quite modest, nominal increases much more in line with income.

So to sum up, we’ve come a long way in 15 years. What I find kind of odd in some of the commentary is that it’s all kind of a sleight of hand, and should disappear over night. To me that’s nonsense, the potential growth of this economy is much higher than it is in the rest of developed Western Europe for a variety of reasons, not least of them being the demographic situation. To me it’s unlikely that that will change overnight. To me over the next five years our potential growth rate is still pretty high. It’s not nine percent because we don’t have a huge pool of unemployed people anymore it’s about five or five and a half percent.

Is the economy likely to grow at that every year? No. Is it likely to grow at that on the average? Yes, I believe it is. The big challenge for the economy is that we’ve massively under‑invested in public infrastructure and housing. So when people say we’re devoting a lot of resources to housing now, and it’s unsustainable, well if it’s unsustainable it won’t be sustained. The reason there are so many resources going into those areas now, is because so few resources went in to them 10 or 15 years ago. So we have an income which is higher than France and Germany, but we have an infrastructure which is patently, massively below them. But there’s no reason on earth why we can’t have an infrastructure as good or better than theirs. We have the resources, the economy can continue to grow at five percent per annum into the medium term for a good long period. And I think that’s what will be the challenge for the economy, to continue that drive into those investment sectors, housing and infrastructure, to deliver a housing stock and a capital stock commensurate with our income.

Well, just in case you should all get carried away with unbridled optimism, rush out and buy shares in the construction sector or, indeed, Bank of Ireland for that matter, I’m going to ask David McWilliams to come along. He’s in many ways the intellectual heir of tradition best answered by my colleague Joe Durkum, whom some of you know, who was always weened out on conferences when things are looking too rosy to sort everyone out and to send them back home with a sense of reality. Dave.


David McWiliams:
Thank you very much indeed, Moore. Good morning, everybody. Now what I’m going to start on is this, initially I agreed with everything but the last speaker said. In fact I think what he said is spot on, so spot on is it that I’m going to give you a challenge, okay, a real challenge cause. The last thing you want to do is come here on a Wednesday morning and say, “Heard two columnists. One fella saying yes and one fella saying no and then we went on into breakfast and on they go”. Now I believe the banking system and Frank I think you’re career has probably peaked now in the bank having picked someone as toxic as me to address your business banking and reap investors. Well lets talk about the banking system right. I have a real challenge. Let’s focus the minds here and forget economics for a second. I’ve a real challenge for everyone in the room. For one individual or a group of individuals, okay? I want to short the Irish housing market okay. I want to sell my house. I have a house in Killiney, Sheriff and Stuart tell me it’s worth two million quid. Whether they’re right or wrong I’m not too sure. I want to sell it to somebody in the room. But I want you to do what the banking systems do. I want to do a sale and lease back arrangement cause I have two young kids who live beside the school they go to and my missus doesn’t know I’m saying this so that’s clearly going to cause all sort of eruptions she does. But this is a very serious challenge this morning. I want to offer somebody in the room a detached house in Killiney, right beside the DART. A sale and lease back operation with a two step clause in it, one at five years to see whether we want to give it a go again and one at ten years. I want a tenancy at ten years and I’ll give you a string of income for ten years. The string of income will be the rate at which we would rent the house today, okay? I believe that rate is somewhere around two and a half grand a month, ok.

That’s the challenge. If you believe Dan, emails and signatures to Dan and Frank after the gig, okay? Now this is a very serious challenge. I want to short the market but I want to live where I want to live which is exactly what Bank of Ireland is doing and AIB have done. They want to short the market but they want to keep their properties and they want to keep their staff where they are. I don’t want to move house. So there you have it. Who’s game? Sale and least back corporation Dans, right and everything is going to be kosher, everything is hunky‑dory. You’ll probably doubled your price in ten years time. I’ll underfund your funding by paying the rent, a stream of income, and we’re all happy.

Now rarely have I seen a bunch of investors… Is that not the best deal you’ve heard all year? Is it? So you don’t believe the housing market? Okay I think Killiney is a fairly good location right [laughing] okay, fairly good okay. I have a gaff okay, right, in Rialto okay with junkies as neighbours… now okay so there’s a point. I really do want to…. here’s an audience of investors, its an audience of business people and there’s a bank here on hand to finance this deal and yes they are my bank as well okay. I want to get out of the market for the next six to ten years, okay? You want to get into the market. There’s the deal of the century. It’s no risk for you cause I’m underwriting your financing by paying today’s rent, whatever the market will bear. You’re getting the asset at a time when Dan thinks it is not near the top of the market and I take a few shekels off the table. But that’s really what I wanted to say today because if you believe Dan, you’ve got to go for this. If you don’t believe Dan then I tell you why maybe its not the best investment but I would like to see a show of hands. Is anybody interested in a housing client? [laughing]

Yeah a few right, there’s a ceann amhain, duine eigin eile? That Irish by the way used to speak the language just a while ago it was what we fought in the revolution but anyway em anybody else anybody no nobody interested. Well, Jesus, Jesus Dan. Well I the difference between Dan and I is I came in on a clapped out eh, two difference between Dan and our football teams are quite interesting and if I were you I’d take this as very instructive and rather fundamental to our analysis. Dan supports Manchester United and I support Leeds United. So at a very young age it was very clear that I didn’t know what I was talking about. The other issue is that I came in on a clapped “I seen you off the telly” taxi this morning, I looked at Dan in his lovely o‑five jag and I’m thinking, “Shit, I should have kept that job”. Anyway, lets talk about but serious the challenge is there, it is a very serious challenge. It is a very serious issue. This is an opportunity, all investors want to come to issues and want to come to conferences to get an opportunity. Here is a great opportunity.

Now I can see is a gentleman here who is going to take me up on it okay. And this is a very serious proposition because I think its time to get out of this market. I think it’s time if there is money on the table, to take your money whether it’s your own house which may or may not be wise, or whether its your investment portfolio which may I think is definitely wise, to get out of the market. I have been in the market since the early 90’s. I’ve bought and sold. I’ve recently sold down almost everything I have and finally getting rid of the house, okay. The sale and lease back is to make sure that we don’t divorce okay and that the kids don’t end up going to a different school. But that’s fair enough and I think that most people would accept that.

But there you have it and the reason I think is the following, Moore was saying was I learned Russian and I did learn Russian is a very bizarre episode in my life but prior to that I was a very worried about linguistics. Because in 1988, doing my final exams finals in Trinity, I remember rushing to the library and I’m thinking, “Jesus I hope these four questions come up cause I’d done nothing else other then the four questions like everyone else in the room, Frank”. Okay, and I go in and there was a fellow there who was always annoying me in class. I never knew him but he used to read FT right. If you’re reading FT at 21 your a spa right? you know that okay? [laughing]. And if your, frankly if your believing it at 41 your a bigger spa [laughing] right. So I used to hate this lad from a distance, how do you hate from a distance which is a great Irish thing. Can’t stand him, never spoke to him, he might be decent, I hate him anyway. And I remember sitting getting a place in the library and I sat down and he’s sitting beside me and I look down and there’s a big Japanese dictionary, and I’m thinking, “Fuck it, I missed something really big.” I said, “Eh, what’s with the Japanese dictionary? And he says, “Well, David he said hmm if you don’t understand or know Japanese you won’t get a job.” Which is a fairly severe thing to tell a man who’s three days before his finals and doesn’t know what going on in the paper. And I said really and he says oh yeah the Japanese have taken over the world, taken over the world. He said couple a years time now the Japanese will own everything, they already own the Rockefeller Center, they own Columbia Pictures, their buying everything. I said, “Really, well is that a fact?

And he says, “Ah yes you just to look at any financial paper so I opened the paper and in the paper it said, The price upon which the Imperial Palace is built in Japan and Tokyo is worth the entire real estate of Canada’ which is the second largest country in the world”, okay. This is an area of six square kilometers in Tokyo or, if you will, the entire real estate of California okay says I, realizing that unemployment now the fella’s from Marian College and the Carlets College right don’t become and economist it’s very precarious okay. So I realize at one point he’s staring me straight in the face cause I couldn’t speak Japanese right. If you went into an airport lobby at that time they said, “Oh the Rising Sun, the peril of the little yellow fellas”, right? Yet all these books telling us that we were basically going to be enslaved by the Japanese. And the reason was the Japanese hit a property boom and the property boom was so significant that is was causing the Japs to buy up all these properties around the world. Little Japanese people going off to Australia buying up the whole Gold Coast. Saying get them out a here, but they bought them out.

Now Japanese banks financing all these investments not least because they were leveraging against fundamentally well bid properties in Japan and they were buying up large properties in the United States. And the banks said you are diversifying your portfolio and makes absolute loads of sense. You’re buying golf clubs around the world okay.

Does it remind you of anywhere at all per chance, right, okay, ah well you know the Japanese make lots of good stuff there very very brand leaders in lots of stuff, were not but now a different issue okay. The reason is very simple, the Japanese got beguiled and seduced by a property bubble. And they’re a smart bunch, the Japs, arguably smarter than the Paddies in certain areas, right? So if you think about the statistics of the palace in Japan being worth more than the entire real estate of Canada, and you pick up the Irish Times property section, and you look in the Irish Times property section at the Take Five at five hundred thousand Euros, you can get a two‑up two‑down in Rialto, let’s say with a couple of junkies in the front garden. Or you can have a seven bedroom chateau outside of Paris, the Nure or straight into the place d’Opera and a couple of Jean de Florette peasants thrown in to run the Cape for you. [laughter].

I have Rialto, me. I’ll have loads of it. Okay?

Ladies and Gentlemen, it is very clear to me that the property market here, which is why I’m offering the chance to buy my place, is overvalued to a ludicrous extent. The question is where do we go from here, and it is very interesting Dan was talking about the infrastructure. I’ll tell you a story of the two harlots. I’m writing a new book, and to do that I’m interested in Botox for a variety of reasons. I’ve noticed over the Christmas some of my female friends looking particularly startled as they hit forty. I said, Jesus, you’re looking well. And then whenever you sit besides someone’s missus at a dinner party, you’re like, fookin’ hell, what happened to you, right? [laughter] It’s true, ladies and gentlemen.

The great thing about Botox, a very interesting drug for a variety of reasons, all the Botox in the world, every single last ounce of Botox is made, guess where? Not in America. Not in Japan. Not in Brazil, which is the second largest market for Botox. Every single piece of Botox in the whole world is made in Westport, ladies and gentlemen. A company called Allergan. The whole thing. So as part of my extensive research into my neurotic friends, I went down to visit Allergan in Westport. I drove my ’99 D Volvo, not my ’06 Jag, on rather impressive roads as far as Mullingar, and then from Mullingar past the Mary‑whatever‑her‑name‑is Bypass, the former Minister of the Environment. What was her name? The Mary O’Rourke Bypass. You go past Mullingar and then you get to Longford and you start going into the Twilight Zone. The Twilight Zone which is the road from Longford to a place called Ballaghaderreen which apparently has a large Brazilian population, which we will get onto in a minute.

As you driving the road is getting narrower and narrower and narrower and narrower, and suddenly you are faced with the appalling vista of the oncoming super‑truck, with 17 renault clios hanging off of it, at about eighty miles per hour. The five, I love the way they are called lovely demographic interests, the five half‑wit Polacks up your hole in an Audi Quattro, with the Polish shaved head and the big bomber jackets on them. So that is our experience and you eventually limp, four stone lighter, into the lovely town of Westport, past what I call a ghost estate. In Westport, one house of every six in this fantastic country of ours, is what?


One house in every six is vacant. We’re building houses for no one to live in. The equivalent figure in the United Kingdom, which has apparently joined the EMU, is one house in 31. So we’re building all of these houses for no one to live in. You past the ghost estate outside Westport, which is financed by the local Fianna Fail politician ensuring that basically Westport will have a tax‑free zone for awhile, and you arrive into the twenty‑first century, which is the Botox factory, where people are smart, they are well treated, they are well educated, et cetera. That’s one side of Ireland, which is the productivity that Daniel speaks about so warmly. Hardly surprising, if you are producing something which is based on the neurosis of forty‑something women and blokes, frankly, who for fear of growing old will spend a fortune on looking like the bride of Frankenstein at dinner parties in Killiney, where you can live at the end of this.

That’s twenty‑first century Ireland, the Ireland we all know and love, the Ireland the IDA talk about, the Ireland which is, frankly, competitive. Then you go back into the real Ireland of the Westport‑Dublin highway, also known as botharin in the language which we dropped not long ago. In the real Ireland, we see what’s going on, and the interesting thing is that I only have the one thing, I’ll read it. Could you put that up so we can see it? It is, ladies and gentlemen, probably the most important table in the whole of Irish economic narrative. It is table A2.2 from the Central Bank, where bizarrely, George and I got a job not that long ago. George Lee here and I nearly shared an office but he got out quickly. He said, I’m not sharing with him, he’ll bring down the name of Economics, and you’re right too. Then, many years ago I worked on this particular table when the figures were reported. This table tells us how much money we’re borrowing.

This is a great little figure. Basically, in there by the thirteenth of November of 2006, this great little country of ours had borrowed, essentially net borrowing, 315 billion Euros. Private sector credit. That’s what we are borrowing. 315 billion. Our GDP, our income, is 176 billion. On the one hand we are borrowing 315 quid, and on the other hand, we have an income of 176 quid. Where’s all of this borrowing going? This is all private sector borrowing. 82 percent of that figure, and the growth of that figure, is going to the housing market. There’s nothing else going on. When you pull back the curtain on the multi‑nationals, and the Botox, I was actually down at the Viagra place in Ringaskiddy, which is another fantastic place, I’ll tell you, just so we have an equal opportunity employer here. That’s well worth having a go as well, if you really want to see bizarre parts of Ireland, Ringaskiddy and Westport. The other thing we make: silicone implants and collagen implants. We have a vested interest, just as an aside, we have a vested interest in making American women really neurotic. So buy the Desperate Housewives DVD box set and take notes, and see how we can influence the world, because Teri Hatcher is going to determine our future. Just so you know all of this. Sound strange? There are tangential connections here.

Back to what we’re talking about. 82 percent of every single Euro that is borrowed today in this country is going to go into property. What else is going on here? Can someone please tell me? If we take out our multinational sector, what else is going on in this country, that isn’t property?

The answer is very, very little. Therefore it is entirely justified to focus on the property market. The property market, we know, is not a sleight of hand, it’s a great thing called EMU. EMU, Dan is absolutely right, in peacetime it is unprecedented. Rarely has a country, of scallies, managed to snaffle the pin card of the ATM machine of another country in one fell swoop. That other country is Germany, ladies and gentlemen. Think about Gunter. Gunter has been working in BMW for 40 years. 64 years old, which means he’s probably the last person to retire, since the Germans retire at 58. He saves a lot. I know this because I go there regularly. He goes on holiday in Dalmatia once a year, takes his kit off, which is really unsightly. Germans over 65 with their kit off, not good, but unfortunately they do it. They don’t spend very much money. They are saving extraordinarily. That’s good. There interest rates are phony. In comes Paddy, who hasn’t the ass in his trousers, but is very keen to buy the BMW that Gunther made in the first place, but doesn’t have the shekels. But he says: “Aha! By joining the EMU, we can get all these German savings, and buy from Bank of Ireland Business Banking and Retail Banking, borrow to buy the stuff the Germans made in the first place.

So what we have is a circular flow of income, really, going from Germany ‑ low savings spending in Germany to high spending in Ireland and back to Germany again. And I see clearly our weakness for apartments in Stuttgart, which is… Dan was saying he doesn’t do these things regularly, but… [laughter]. Anyway, he was telling me that he was talking in one of these recently and a couple of ladies come up to him and they said to him, it’s all very well in their eyes, but:

“What do you think of the price of apartments in Berlin?”

“Well I haven’t been to Berlin, so I wouldn’t know.”

And this reminds me of my own mother, right? Because what happens at a certain time in a property boom, is that we all think we’re George Soros, OK? Like my mom is a retired schoolteacher, and she’s from Cork. And we know that everyone from Cork is one thing, is they’re all snobs, right? Have you ever met a Cork person who is not a snob? They don’t exist. Just scratch the surface ever so often, and that comes out.

My mother says to me the other day, she says: “D’you know that Mrs. Murphy down the road? She bought an apartment. In Fuengirola! For 49 thousand euros… and tis selling now for 160.”.

I said: “Are you serious?”.

She says: “D’you think we should get half a dozen of them?” [laughter]

And I’m saying: “Listen to JP Morgan when he said: Nothing (think about Ireland) so undermines your financial judgement, as the sight of your neighbour getting rich’.” [laughter]

Now apply that to the great boom we are seeing, OK? And Gunther, unbeknownst to Gunther, is financing all of this! And therefore, just think about this figure for a second now, because I have it here in front of me, so I should talk about it… In April of 2004, let’s go back actually to December of… January 1st, 2004, we had a 156 billion borrowing, right? 156 ‑ big, big number ‑ billion borrowing. We now have 314. So we’ve almost doubled our borrowing as a nation in what, 24‑odd months.

Just draw a bit of breath here… this is a lot of bread that may have to be paid back. If we could only devalue the Euro, it would be fab. We could inflate our way out, like every proper country does. OK? But we, for some reason… our political class says no’, and then we think of our political class! I observed the budget from a distance a couple of weeks back. I ask anybody in this room to give me any evidence of any sign of any policy, on anything, just anything at all, please. I went through it and

I said: “Gee, there must be some great vision in Ireland, and it must be manifest in the budget.” Right? There is NO evidence of any coherence whatsoever in government policy as we speak.

Now it is very funny, because Moore was talking about… well, there is evidence of tolerance of lots of things, Moore was talking about the Kildare Conference. And I was talking to somebody the other day who was at this economic bash, which was basically…you can’t just go down and get pissed. And some academic talks and another academic, using all sorts of hard sums, that counters that.

And he was saying: “I was supposed to like it down there and it was just fantastic, but the main Dublin‑Limerick Road… last October, I saw something very odd.”

And I said: “What was it?”

And he said: “You know the Stop/Go signs we use on our road works?”

It’s the best job in the world, right? A lad… Stop… right? And this is a main… from the biggest city to the fourth biggest city in the country and that’s including Belfast, because I’m inclusive, just trying to get the Sinners [Sinn Fin members] over the line. Even though we know it is not a country, and it’s a weird place [laughter]… and we don’t want it! At all! [laughter]

But the point is, gentleman with the Stop/Go sign, this is Ireland, right? This is the great economy, the envy of Europe! And Stop/Go signed, and he said, Stop’, so your man pulls up and he stops. And the lad with the Stop/Go sign puts the stop sign, plows it into the ditch, goes across the road, and opens a can of Coke, and a packet of crisps, and starts munching away. Your man counted 117 cars go past, and our Stop/Go man in the high viz jacket gets a phone call on his mobile. From the other guy, at the very top, who is about 600 yards away, to tell him:

All right Mick, off you go’.

He puts down his packet of crisps and his coke, and he turns out to go. Now that is an Ireland we all recognize.

Think about what is happening here. We have become seduced by the property market, which in itself is generating wealth, because it is generating returns over and above what it should do on any rational basis. This is driving what I would call consumer envy’; I have no doubt you do need 4x4s. There’s nothing worse than those mudslides in Donnybrook [laughter]. You know, the entire Andean village just swept away. Kilmacud gone, overnight, OK? But if you have the 4×4 and the big axe, sure, you’re grand, because the roads just disappear into the Amazon, down by the dodder, right?

Again, we’re having this bizarre thing… I’ll just tell you very briefly one last thing and go… my father, who is a 78 year‑old pensioner, about three years ago looked at me in horror one Saturday morning when I came home with my kids (which I usually do, you deposit them and they have to go see granddad and it’s “Bye! See you in a few hours!” and you sit down and read the paper).

And I said: “What’s wrong, Dad?”

And he said: “Gee, something shocking going on.”

I said: “What?”

And he said: “I… have got a new lawn mower.”

I said: “Really?”

He said: “Yeah.”

I said: “That’s grand. You know, it’s not a big family tragedy, nobody has died; it’s not the end of the world.”

He said: “No no no, I was down in a garden centre which will remain nameless… (Mackeys in Sandecove, by the way, if you want to go there) and it, as a… a young fellow said to me, “My dad purchased a lawnmower made by Kawasaki”. I thought Kawasaki made motorbikes, but there you go. “No no,” said the young fellow, and I (my dad) asked him: “How much is the lawnmower?” and h

e said: “1700 euros” (whereafter he died, he is on a 259 euro a week pension). And he said to the young fellow: “What does it do?”

And the young fellow said: “Well you know, Mr. McWilliams, this particular model would cut the grass in the Sierra Nevada Mountains.” [laughter] Interesting!

He said: “If you push a button here it goes up on its side, like that, and it cuts at an angle of 45 degrees, all the way around.”

Now, my parents live in Dun Laoghaire. The last time I was staying there and looked out, there was no Pyrenees’ view. There weren’t even drumlins; there were flat front gardens and back gardens. But what is happening is, as a result of the credit associated with the equity release (another great expression that we’ll laugh at in some years’ time, it’s a bit like liberating Iraq’… [laughter]. I mean I’ve heard of liberating Kuwait, but liberating equity? Now that is something that the banking system does).

Anyway, so my father says…

I said: “Did you buy the [inaudible]?”

I said: “Fair enough.”

But the question is: someone in Dun Laoghaire IS buying the Kawasaki lawnmower. Because the suburbs have been afflicted with a very strange, postmodern disease called Lawnmower Envy’, ladies and gentlemen. It is not good enough simply to have kitchen, that you could feed the entire famineship that left Cove in 1857 or ’47; you have to have the right type of lawnmower. The thing is what’s happening is, we’re in really a sort of a credit‑driven consumer inferno, which is masquerading as an economic boom, and ultimately it is based on house prices.

And let us conclude where we started, in the Japanese situation: Japan, very bright people, controlling their own monetary policy, their interest rates didn’t go up particularly much, and the property market fell from those dizzy heights of 1988‑1989‑1990, and have continued to fall. Japanese property prices, 17 years later, in central Tokyo (not the business district which seems to have gone up, but where the punters live) are lower than in 1990. I think that is our big danger here. But if you don’t believe me, there is, ladies and gentlemen, a house for sale. Thank you very much indeed.

Moore: Well, don’t say you weren’t warned. Now, time is passing and what we want to do now is invite people from the floor to make a comment on or to ask questions of Dan or of Dave and we have a roving, at least one, roving mike. How many have we got? We have three roving mikes. So if you would like to ask a question, if you have any comment to make on that, please put up your hand. And I suppose it would be nice for the rest of us if you would tell us who you are at that stage. If anybody has any questions he or she would like to put? Yes, there’s a lady in the middle here.

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