The June 2009 edition of Intercom is now available. Read a feature article on the global financial crisis and view the Contents page. Subscription details below.


June 2009 issue

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The global financial crisis and its impact on Ireland:

Professor Ray Kinsella (UCD)

Transformation and a values-based economic system are necessary to move us back from the brink

The global financial crisis, which originated in the subprime mortgage market of the United States in the early years of this decade, has metastasized into the single greatest economic shock’ to western liberal democracies, short of war.

This crisis is wholly different, in nature and scale, to the cyclical fluctuations which tend to be characteristic of western capitalism. Economic projections by both national and international agencies, including the IMF, forecasters have consistently failed to keep pace with the precipitous decline in global growth and trade as a result of the crisis. It has levelled long standing global financial institutions, destroying whole market sectors in the process. The erosion of the balance sheets of financial institutions, in the face of a meltdown in market valuations, as well as grave uncertainties, is without precedent.

In Ireland, the impact on economic growth and, by extension, employment, living standards and the public finances, has been shockingly abrupt and brutal. Government’s fiscal position, and in particular the decline in tax revenues relative to government expenditures, have translated directly into cuts in Public Services on a scale that is hardly conceivable.

Ireland has had three Budgets’ in the space of one year and still the fiscal deficit and borrowing requirement are beyond anything that could have been conceived even a year ago.

This reflects three factors: Firstly, the small and open nature of the Irish economy -we are highly vulnerable to the recession in the international economy as well as to the implosion in market confidence. Secondly, while Irish credit institutions avoided large exposure to so-called toxic assets’ (the product of the kind of malign Business Model’ that has impacted on banks and financial institutions in some other countries), they are impacted by the effects on international credit and capital markets. Thirdly, our economy is suffering from self-inflicted wounds. These have taken the form of excessive lending to the whole spectrum of property and construction related sectors, as well corporate behaviour that has caused reputational damage to Ireland abroad and a loss of morale and trust at home.

Collectively, these have pushed Ireland’s economy into economic dislocation and deflation; they are generating economic and social stresses on individuals, families and domestic businesses not seen before. There are no precedents and, whether measured by CSO data or the insights of the St.Vincent de Paul Society, the situation continues to deteriorate. There is growing pressure on our political institutions. Politically, Ireland and indeed other developed economies, are being impelled into a different place – for which the nationalisation of banks stands as an apt metaphor

The pastoral implications and challenges are enormous.

This crisis is an inflection point: it could neither be modelled nor can it be firewalled. The true measure of the scale of the crisis is reflected not only in the devastation of lives, as economies continue to stall, notwithstanding the sheer scale of financial interventions by national authorities – as well as coordinated international action, including agreements at the recent G20 meeting in London – which have had little discernable effect so far in arresting the crisis.

There is a reason for this. The root causes of this crisis are not primarily financial, or economic. Certainly it is possible to identify predisposing factors in these fields – as well as negative feedback effects, such as the impact of the Credit Crisis’ on the decline in access by business to even normal financial resources. But these are in general symptomatic of a deeper reality.

The crisis is primarily ethical in nature, with inevitable financial, economic and political consequences. In an absence of a rigorous understanding of the ethical nature of this crisis, it is simply not possible to begin the process of transformation – globally or in Ireland – that is necessary to restore stability and sustainability.

Communism, as an ideology with a distinctive economic model’, was based on production and historical determinism. The human person, shorn of the transcendence of being made in the image of – and being redeemed by – the Living God’, was reduced to a unit of the proletariat. Communism imploded. At the same time, a form of Capitalism – based essentially on the Person’ as consumer and driven by what Galbraith, in his prophetic The Affluent Society, argued was a Wants’ (as opposed to a Needs’) – based economy and one facilitated by semi-enforced financial indebtedness – gained ascendancy in Western developed democracies. It was this that was encompassed in – and the key driver of – the short-term Shareholder Value’ business model. It is this model -riddled with moral and economic contradictions – which has collapsed. This collapse is catastrophic in its consequences.

Both ideologies, with their specific Business Models’, have much in common, which made their collapse both inevitable and foreseeable. They denied the existence of an objective moral order. They demeaned – and in a very real sense enslaved – the human Person. They had no reference point outside of their own Paradigm.

This, in fact, provides a necessary starting point for both diagnosing the reason for the present catharsis and the template within which recovery and the development of a sustainable economic order, shaped by the characteristics of national economies as well as by innovation and globalisation, can be begun.

This must be said. The Catholic Church has developed the most rigorous critique of the conditions for a sustainable and just economic order. It is embedded in the Scriptures. It has been developed in successive Encyclicals. It is set out in the monumental Compendium of the Social Teaching of the Catholic Church – a resource of truly global significance. It is predicated on a rigorous understanding of The Common Good’, at the heart of which is the human Person.

The outcome of the global crisis is indeterminate. The most recent data and assessment from the IMF are bleak. Moreover, there are compelling reasons for arguing that the scale of government interventions are creating contingent liabilities that represent a future inflationary threat, which could well lead to a definitive meltdown of trust. This possibility should not be discounted. Such a collapse of confidence almost happened in October 2008.

The Irish economy – a small sub set of global markets – faces the most serious challenges. The difficulties and pressures confronting Government are formidable. It is no platitude to say that they need prayers – after all, it was the denial of this reality, and all that it implies, that lead inexorably to the present crisis.

It is also true to say that there is little evidence of an understanding of the true nature of the crisis or of what is required. We are following misconceived economic policies; political institutions are in denial of the kind of the transformational changes that are required. There are objective ethical values that are being violated in political discourse as well as in our institutional behaviours and in the undermining of the status of the Family.

Ireland is a Christian nation in the truest, most inclusive, sense of the word. The great Benedictine scholar, Dom Anscar Vonier, once wrote: Christ could not be the living power He is without deeply modifying the ethical sense of the nations that worship Him. … Now, the lessons of history are that wherever the name of Christ is alive, there we find great ethical assurance and certainty.’ (The Personality of Christ).

This generation is, as Pope John Paul II warned in his address in Limerick, crowding-out’ Christ, across pretty well all economic, social and political domains. There are consequences, and they form the narrative of the fall of both communism and corporate capitalism. In Ireland, the lesson is this: A new capitalism’ cannot be built on an old politics’ or on an ethical’ sense emasculated of our Christian values.

Professor Ray Kinsella is on the Faculty of the UCD Smurfit School of Business and the Management Institute of Paris. His most recent book Rebuilding Trust in Banking is published later this month.


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