# Transcript of Morgan Kelly's  SME speech March 2013



## Brendan Burgess (9 Mar 2014)

_Morgan Kelly addressed the UCD Economics Society and you can watch it on youtube.  It's 37 minutes long, but you can easily skip the last 9 minutes which  is just a rant about the Irish education system.  There is a 30 minute Q&A session afterwards which you can skip as well. _

_I think it's handy to keep the transcript separate from the discussion, which is in this thread._

It's nice to be back and to be thinking about the Irish economy again. I haven't done it for a few years.


The crisis, we are told, is over. 

What have we learned from it. 

According to the official narrative, there were two very bad people - Fingers and Fitzpatrick. But apart from these people, everyone else, politicians and the Financial Regulator behaved with probity. Not always competence. In Ireland we don't do competence. Thanks to our European overlords, we are sorted. 


This is how we approach things in Ireland - child sex abuse, Health SErvice Administrators giving themselves huge bonuses - universities administrators as well. 

I don't agree with this view 

What I do agree with - We have had a remarkable recovery in the past few years.  Unemployment has not fallen. Over the past few months we have seen a big rise in employment. The economy is growing quite rapidly. 

The impact of the crisis was big, but a lot smaller than we would expect in the circumstances. 

We had a 20% fall in GNP. But when you think that 14% came from the construction sector, the fall is surprisingly small. 

This is very very surprising, this is a big puzzle. The usual rule of thumb in economics is that you suffer for about 10 years after a big credit bust. that is if you are lucky. Japan has been floundering for 25 years.


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## Brendan Burgess (9 Mar 2014)

5.33
This is very very puzzling

The answer is "Draghi". He did what he said he would do "whatever it takes" . He has lent unlimited amounts to sovereigns and banks.

This has nothing to do with the Irish government.  We still have this enormous debt out there from the bank bailout. 

Irish people borrowed very heavily during the boom and now have very low interest rates if they are repaying them. If they are not repaying them, banks are not pursuing you. You have complete forbearance. 

Banks don't need capital anymore. Banks are still hemorraging capital. The credit is still flowing. This is most visible in the housing market. 

Usually when prices collapse, they collapse for a long time. There are two reasons for this. 
Firstly on the demand side, banks are not lending 
On the supply side, banks are going after people to get their money back.

Neither of these things are happening here. 
No forclosures
Banks are still giving out mortgages, although fewer than before.  You can only get a mortgage if both parners are in the civil service, health or education. 

Places where civil servants live like south county dublin have house prices rising , but they are not rising elsewhere.


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## Brendan Burgess (9 Mar 2014)

11 There are big problems on the horizon and that problem is Draghi

He has been a big success generally, but he has not been a success in sorting out bad banks.

We have lots and lots of very shaky banks not just here but also in Germany. Their Landesbanks make our Anglo seem cautious in comparison.

Every few years the ECB says we are going to need stress tests. But they chicken out. As every bank turns out to be better than average. It looks as if it will happen with the next stress tests. 

In the US all the banks raised new capital, but it hasn't happened in the eurozone.

But Draghi says that the Irish banks need more capital. They were capitalized a few years ago , but that was only for developer loans. there are still losses due to mortgages , small business loans. 

It seems as if the ECB would like a trial run in Ireland. 

What that means is that there is going to be a big clean up
There will be forclosures on mortgages and on SME loans.

A lot of owners of SMEs borrowed a lot to buy properties, so a lot of these SMEs now have very big losses on property. Banks are not calling in their loans. 


If you have a large company with unsustainable debt, you can sell it on. But if you call in the loans of a small company , its main asset is its owner, so that company is gone. 

We are going to see a lot of SMEs going under.

If you are in the public service, your view is that these companies are chancers and tax dodgers and should be let fall.

if you work in the private sector, chances are that you work for an SME

There are two peculiarities of the Irish economy
The first is that we have a lot of multinationals. They account for a lot of our exports but very little of our employment. Everybody knows that. 

The second peculiarity which is obvious but no one knows is that there are very few large firms. 

It's an interseting question. Why do so few small Irish firms become large firms. 

The point is - the Irish economy is equivalent to the SMEs. 

A lot of them will be wiped out in one go. This is potentially an enormous problem which no  one seems to care about.


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## Brendan Burgess (9 Mar 2014)

18 - So how should we deal with this? 

It's pretty easy. You need to figure out the size of their property loans relative to their  profitability(?) and relative to their employment. 

Some of these are going to be gonners. Others you can say "We will park your loans for 5 years"

Separate the property loans from the businesses. It's very , very simple.

The obvious danger in doing this is that you cannot turn this into a bottomless trough for political patronage. Politicians will look after their friends. But you can deal with this very easily by publishing all such deals.  You must publish your finances. Do the opposite of what has been done with mortgages. 

Banks have been making token efforts with dealing with people with mortgages. They have been extending mortgages from 30 years to 50 years. I have seen guys from the CB with straight faces saying we will extend mortgages out to age 75. This is known as extend and pretend.   There is no hope that you will ever get these mortgages back. 

This has been looked at extensively in the states. The only thing which works is to reduce the principal which is owed. This has started to happen in Ireland. AIB has announced that they are starting to write down mortgages. But the press has ignored it.  So AIB has been giving borrowers 10s and likely 100s of thousands of taxpayers' money. There is no details who these people are and what are the criteria being used. 

If I am a cynical person, which I am not, I would suspect that a big criterion is that your kid goes to the same rugby playing school as the manager in AIB.  I don't know. Nobody knows. 

We have learned that the judgment of the banks is to be trusted  [audience laughs] 

The decision of AIB to give hundreds of thousands of taxpers' money to individual people that they are going to do a good job in it.


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## Brendan Burgess (9 Mar 2014)

23 

The government realises that the ECB will give us money because we are the good guys. We are not the southern European pickpockets.

But even if they do give us the money, the collateral damage is going to be huge. 

Politicians are not interested in the SMEs.  They are below the radar. They don't make political contributions. They don't give free drink to journalists.

But most Irish people work there. The current government could save them but they won't. They boast about their lack of policy. They have raised purposelessness to a high art. 

In some senses, this is realistic. 

You do what you are told by Europe, and the electorate doesn't matter. 

The same thing is happening as happened with developers. We could see this thing coming from a long way off but in the end,there is complete panic, Anglo goes under, people do stupid things.


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## Brendan Burgess (9 Mar 2014)

(Now a real classic at 25.40) 

This is the existential problem facing the Irish economy - the small businesses and again we know nothing about them. 

In very vague terms we know that they have lots of large loans but we don't know what percentage of employment is accounted for by them.

We know nothing about them.

So that is the first problem we face.


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## Brendan Burgess (9 Mar 2014)

26  Note from here to the end is a long rant about the educational system which can be skipped. Basically he says that by failing to produce well trained graduates we are screwing up our economy in the long run. 


 In the long run we face a problem from the Irish educational system 

The last time we had real growth in the 1990s 
On the demand side most of the employment created was by small firms 


On supply side, the Irish universities was churning out well trained graduates which created employable workers

But since the 90s and particularly 2000. If you look at kids aged 15, Irish kids perform comparatively well. In maths, the Irish do pretty average.  

(I missed his point about the connection between economic growth and performance in the PISA test) 

There is one peculiarity about the Irish performance.  VEry few Irish people do particularly well. We are doing pretty well but no one is doing very well or very badly. 

WE are not doing well for the stronger kids. 

The approach to the Leaving Cert for the last two years, has been that it's too hard, so we have dumbed it down, especially in maths. 

This goes against everything we know from educational research. Most educational research is crap, but one thing they have found which is true which is common sense, is that the harder you push kids, the more they respond, the more they learn.  And as you dumb things down, the less they learn. 

By the time they come to University. Kids come in here believing that they can't learn - especially in maths. This is a problem for us in maths. They have learned helplessness. 

The Universities have gone out of their way to shoot themselves in the foot.  Irish universities were always pretty mediocre, certainly in terms of research. However, what they did do pretty well is that they trained lots of students to do well at a low expense to the Irish taxpayer. And they did this by having no facilities. 

Crappy libraries. rundown buildings. crappy offices.  And this is what a university ought to be. 

When I came to UCD 15 years ago there were hardly any administrators. Now we have two administrators for every academic in UCD.   We have had this gigantic expansion at a time when IT should be making things easier.

We have 3,000 employees in UCD, 900 of whom are academics.  The most egregious of this has been in research funding.  When money was plentiful, the universities set up bureaucracies to compete with each other for Irish government money.  So we have 70 people earning €70k each - the same as academics.  But all of these people are still there although there are no grants anymore. 

As austerity has kicked in, the response has been to cut academics. Between 2007 and 2011, the number of academics in UCD fell by 20% .

In the economics Dept we went down from 25 to 17. But we lost the strongest people, so it's worse than it seems from the figures. So we have fallen in the international rankings which are extraordinarily dodgy and meaningless looking at small changes. We went from 100th in the world down to 200th in the world. No institution has ever fallen so far and so fast and the reason is that we just don't have academics in the place.

So does this really matter?  

It does.  

Spanish and Italian university graduates do less well in language and arithmetic than Japanese people of the same age who have only been to secondary school.  So what you learn in University does matter.


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## Brendan Burgess (9 Mar 2014)

35.23

By failing to produce well trained graduates, you are screwing up your economy in the long run


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## Brendan Burgess (9 Mar 2014)

Questions and Answers session 

A very poor session and can be skipped. 

*How likely is that going to be? 

*It depends on what share of employment the SMEs have and we simply don't know that. 

We know more about the Medieval Irish economy than we know about SMEs. I am serious. 

As far as economists are concerned, Academic and Central Bank, they are soooooooo boring.  But they are the Irish economy.

*4. You are saying that we have a mortgage crisis and a small business crisis, but you are giving us no figures. Do you think...Do you have a figure for the SME debt and if so, where might we get the money to pay for it? 

*The amounts will be smaller. The last time I did a back of the envelope calculation, I reckoned it would cost €90 billion in total.  Around €25 billion for the SMEs. 

8.30 *Question about austerity 
*We haven't had the credit contraction we expected. Austerity has been useful in that they are stringing us out. It's part of that theatrical performance.  

German notions of economics are radically different from the Anglo Saxon ones. They think it's about morality.  We think of economics as amoral.

14 *A question about the future of institutions 
*Hirschman said that you end up with a tyranny of the weak by the incompetent. And that is as succinct a description of Ireland as you will ever come across.  You have a very small pool of talent - in the Central Bank, in the government, everywhere. The stronger ones lord it over the weak. 

14.30 *Do you still feel that a group of mortgage defaulters could have political power? 
*When it started off I thought that this could have dramatic political consequences - people unemployed and being booted out of their houses. But I feared that there might be a hard-right anti-Euro anti-traveller mentality, but it's not going to happen now.   But the reason for that is that we are short of talent. We have no Hitler wannabes. Our politicians are crooks and incompetent but they are not scary. 

*16.30 Do you feel that debt forgiveness sets a bad precedent? 
*It's a matter of being pragmatic. But you need to have transparent rules.

*22 What would happen if the Irish government refused to meet the requirements of the EU*
You would have credit to the banks cut off.  Your savings in the Irish banks would be lost. That would not be pleasant. 
*Why? 
*Your banking system would collapse. The economy would not function 

*23 Why don't we inflate our way out of the problems? 
*That is essentially what Draghi wants to do. 
Moderate inflation of 4% a year might drive the Germans out of the Eurozone which would solve a lot of problems.  (laughter) . No - that is true. 

*23.30 what would happen if Britain left the EU
*Nothing would happen. There would be no trade sanctions. Others would see that the sky hasn't fallen in, so they might leave as well. 

*24.40 If the banks had gone under insted of kicking the can down the road, would we have been able to get back on track sooner? 
*Had we been very tough we could have inflicted the losses on the bondholders. It's irrelevant at this stage.


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## Brendan Burgess (9 Mar 2014)

This thread is for the transcript only.

YOu can discuss it on this separate thread

Morgan Kelly is back http://www.askaboutmoney.com/showthread.php?t=185939


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