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Ireland and America, The 2008 Crash - Part 1 · Cash Lads

• 0:01
  SPEAKER_00: Welcome to Cash Lads.
• 0:02
  SPEAKER_00: My name is Paul Malloy from BoxcoverTax.ie and this is Marcus Doyle from Clear Financial.
• 0:08
  SPEAKER_00: We're here to take the mystery out of money and finance with some history, some stories, and plenty of humor too.
• 0:22
  SPEAKER_01: Marcus, how are you today?
• 0:24
  SPEAKER_01: Sure, good.
• 0:25
  SPEAKER_01: All good.
• 0:25
  SPEAKER_01: All good.
• 0:26
  SPEAKER_01: Today we're going to um we're going to talk a bit about the 2008 crash.
• 0:31
  SPEAKER_01: And um obviously in Ireland we were very, very, bad, very, very badly affected by that.
• 0:36
  SPEAKER_01: I think everyone everyone knows that.
• 0:38
  SPEAKER_01: And of course, some of our listeners mightn't have might have been in school or you know, even younger uh when this happened.
• 0:44
  SPEAKER_01: It is, after all, 18 years ago.
• 0:46
  SPEAKER_01: It's hard to believe how long ago it is.
• 0:47
  SPEAKER_01: Things are getting old now.
• 0:48
  SPEAKER_01: I know.
• 0:49
  SPEAKER_01: And so we're going to talk a bit about not just but not just the Irish perspective, because there would there was a based on what was going on in Ireland, there would have always been some kind of crash.
• 1:00
  SPEAKER_01: You know, we we had just gone way too far.
• 1:03
  SPEAKER_02: But street cars, property in bulk area that hadn't been built yet.
• 1:07
  SPEAKER_02: Everyone went crazy.
• 1:09
  SPEAKER_02: Deckland, you know, all the decks, people had decks, yeah.
• 1:12
  SPEAKER_02: Yeah.
• 1:13
  SPEAKER_02: They were rotting, and there's rats living underneath.
• 1:17
  SPEAKER_01: And then there was um at the same time, we had the the crisis in America, you know, the the big big big the housing crisis in America that became pain a massive financial crisis.
• 1:29
  SPEAKER_01: They happened together.
• 1:30
  SPEAKER_01: So to understand what happened in Ireland, we've really got to talk about both.
• 1:34
  SPEAKER_01: So just um for for for those for those that remember those that don't, uh the 1970s and 1980s were pretty grim in Ireland.
• 1:44
  SPEAKER_01: Um you know, we we suffered as an importer of oil, we suffered hugely in the 70s from from the oil crises.
• 1:54
  SPEAKER_01: But not not not even just how much it impacted in terms of travel and uh transport and moving around, but just the the increase in prices as well.
• 2:04
  SPEAKER_01: Um you know, we we just really struggled to to know what what to do about that.
• 2:09
  SPEAKER_01: And and and people in the 1980s, you know, unless you had good connections or there was a family business, um, there weren't much opportunities.
• 2:18
  SPEAKER_01: Uh if you finished college, you probably spent your last year or two of college checking out accommodation in London was a very, very popular destination.
• 2:26
  SPEAKER_01: Um, you know, whole classes um in in universities, you know, being uh very few of them working in in Ireland, which is which is awful, which is absolutely awful.
• 2:37
  SPEAKER_01: And um, you know, government, successive governments just couldn't get a handle on this.
• 2:42
  SPEAKER_01: The tax rates were just unimaginable.
• 2:46
  SPEAKER_01: Personal tax rates were just unimaginably high.
• 2:48
  SPEAKER_02: Remember, dad said his his taxes over half his wages were going to the government, yeah, over half well, well over half, uh, and for you know, for those in business as well.
• 2:56
  SPEAKER_01: So um, I mean there was a there was a payoe um you know uh marches and demonstrations, you know, uh lobbying for for lower taxes, but we we were spending so much on the on the public sector, on on the health service, uh education that you know we we couldn't keep paying for those things without higher taxes.
• 3:18
  SPEAKER_01: That's that's that's that's kind of the trap we got into.
• 3:21
  SPEAKER_01: Um but this all changed in the late late 1980s when um Charlie Ohe got in again after a long period of being out.
• 3:29
  SPEAKER_01: And he, along with his uh finance uh minister Ray McSherry, who who got got nicknamed Mac the Knife, and the reason Mac Sherry was not called Mac the Knife was because he cut, cut, cut.
• 3:41
  SPEAKER_01: So, you know, hospitals cut the number of nurses by 10%, 15%, uh schools, you know, 29 students per teacher, let's make that 35.
• 3:52
  SPEAKER_01: Cut back on the number of teachers, cut back in the number of guards.
• 3:54
  SPEAKER_01: There was just this cut back every public sector, cut back city.
• 4:00
  SPEAKER_01: And we've we've we've spoken before about what what Bill Clinton did, something similar when he came in um in 1993.
• 4:07
  SPEAKER_01: He did all kinds of intentions to to spend money on healthcare and uh and education, but Alan Greenspan, the the you know, very highly respected uh at the time, uh chairman of the Federal Reserve, said, listen, no, the budget deficit is mad.
• 4:22
  SPEAKER_01: The Republicans, both Reagan and and uh Bush, had just spent so much money, you know, on, I suppose, defeating communism, but also give money to rich people in the form of tax cuts that he said, if you could just uh cut spending and raise taxes for two years, there'll be an amazing dividend.
• 4:42
  SPEAKER_01: The bond market will roll will react, will get interest rates low, and you'll you'll be flying it.
• 4:47
  SPEAKER_01: And that's exactly what happened.
• 4:48
  SPEAKER_02: He had a lot of trust in him actually, because could have because he only has four years, so now he has to be raised.
• 4:53
  SPEAKER_01: Hugely, I mean, it in fairness to Clinton, it was a very, very brave thing to do.
• 4:57
  SPEAKER_01: Now he he clearly trusted um Greenspan.
• 5:00
  SPEAKER_01: Uh again, he he Greenspan was a highly, highly respected uh it worked his favorite, a lot of growth after that, big time.
• 5:07
  SPEAKER_01: But it worked.
• 5:08
  SPEAKER_01: Yeah, it worked because the if you if you if you can demonstrate that you can behave responsibly financially, um the barn markets will reward you with lower interest rates.
• 5:23
  SPEAKER_01: And we had a similar kind of if you like misery dividend, or you know, uh the same thing happened to Ireland in in around World Cup 19, uh, which which Ireland was.
• 5:34
  SPEAKER_02: It's all turnaround when we got into the World Cup.
• 5:37
  SPEAKER_01: Well, all turnaround we got into the world.
• 5:39
  SPEAKER_01: It was really quite incredible timing, but the it's it's all around that time where he was.
• 5:46
  SPEAKER_01: We were we couldn't lose.
• 5:47
  SPEAKER_02: Unless we had, you know, my lovely horse, we were gonna win, you know.
• 5:51
  SPEAKER_02: And then it was costing too much to hold it, so then we start putting in rubbish songs.
• 5:55
  SPEAKER_02: I think my lovely horse could have got into it.
• 5:58
  SPEAKER_01: Not a bad song to be our father's head reference for for our younger, uh, younger listeners.
• 6:03
  SPEAKER_01: So um so so so early 1990s in Ireland, things things started to turn.
• 6:10
  SPEAKER_01: And you know, one of the things that that that that uh well it just I not I'm not a supporter, Mr.
• 6:16
  SPEAKER_01: High, but one of the things that happened under his uh his premiership was that the IFC.
• 6:22
  SPEAKER_01: We we had this financial centre now, which probably initially was kind of more what we might call back office, and it wasn't exactly the most glamorous or exciting jobs, but that these were still very well-paid jobs for the time, because at that time Irish wages were very low, uh, low compared to Britain.
• 6:42
  SPEAKER_01: And we were you know looked on very favorably by some by by by American multinationals.
• 6:49
  SPEAKER_01: Um and they they started to come in greater numbers, and they liked the fact that we and they still do like the fact that we speak speak English, the same language.
• 7:00
  SPEAKER_01: Uh culturally, we're we're quite similar.
• 7:02
  SPEAKER_01: And low corporation tax, of course.
• 7:04
  SPEAKER_01: Uh if you're living in one of these really hot states, it's kind of nice.
• 7:08
  SPEAKER_01: You might think that the Irish weather, you know, some of them do appreciate the the Irish weather.
• 7:12
  SPEAKER_01: So so all kinds of and the corporate exact corporation tax rate was a huge factor, 12.5%.
• 7:18
  SPEAKER_01: So remember when that came in actually, well, that the lower rate of tax.
• 7:21
  SPEAKER_01: I I think we've had we've had low, you know, in the you know, the Shannon Shannon area, there was kind of uh an economic zone in the Shannon area, there was a manufacturing uh tax rate of 10% as well.
• 7:32
  SPEAKER_01: So uh fairly fairly early doors.
• 7:35
  SPEAKER_01: And um another you know major help was these you know the structural and cohesion funds from Europe.
• 7:42
  SPEAKER_01: So I mean people, particularly some of our younger listeners might not realize, but there was a time that the roads in Northern Ireland were much, much better.
• 7:51
  SPEAKER_01: The occupants of the counties, the occupants, as I call it, um Northern Ireland to everybody else.
• 7:59
  SPEAKER_02: But um so so with all that European money, um well, we remember all the signs, Disney Road and the EU would be on the sign, we see the EU sponsored by the remote waste um partly funded by the EU Economic Fund or whatever it was, yeah.
• 8:15
  SPEAKER_02: Um or infrastructure fund, I can't remember what it was called.
• 8:18
  SPEAKER_01: There was uh I I I at at the time in in the uh in the early 90s, that you know, Pete the famous Pete Flynn, Pork Flynn was out in Europe negotiating a very, very healthy uh deal from the Pork Flynn, the guy with all the houses and that all the house.
• 8:35
  SPEAKER_02: Yeah, yeah.
• 8:36
  SPEAKER_02: So he was good to run all those houses, if I remember.
• 8:39
  SPEAKER_01: Well, I mean, I suppose it was, but all all that extra money he was getting would have helped, um, particularly that check for 50 grand.
• 8:45
  SPEAKER_01: But anyway, so he he he reported to Albert Reynolds, the teacher at the time, said Albert, we've had a great deal here, you know.
• 8:51
  SPEAKER_01: We're gonna get I think it was like eight billion or something like that, which was huge money at the time.
• 8:56
  SPEAKER_01: And Albert said to him, Would there be another shilling in it?
• 9:01
  SPEAKER_01: He wasn't talking about a shilling, and they did come back because the Europeans were just they were just happy to give us money, you know.
• 9:08
  SPEAKER_01: And um, and I think we spent it certainly we look, we we certainly have good, you know, good a good road system, good infrastructure.
• 9:16
  SPEAKER_02: I think we'd be going a bit too far, but we certainly have good, you know, uh the roads in the east, and they said I I think they missed out in the the the northwest and the north is is still.
• 9:26
  SPEAKER_01: Oh, I think Johnny Golden still needs one.
• 9:29
  SPEAKER_01: But um, you know, roll on to kind of you know 2000, 2000 and and and one, and the then finance minister uh Charlie McCreevy, who with the Progressive Democrats are called RTD, Charlie, and uh I know at election time used to walk into a pub and said, you know, uh the next round is on is on me, and apparently that went that went down very well.
• 9:54
  SPEAKER_01: We got away from this kind of high tax, high spending of the of the of the uh you know the the the eight the 70s and eighties, and by the 90s and early 2000s, that that idea of you know loose regulation, low taxes, free markets had taken over.
• 10:12
  SPEAKER_01: And McCreevy was really uh the PD and all but name.
• 10:16
  SPEAKER_01: And um he had had successfully run the economy uh for Bertie Yehorn, and because the economy was so hot, they came up with the SSIA scheme.
• 10:25
  SPEAKER_02: Yeah, well, I was in still in school, but I remember uh an economist came into our school and said this you'll never get anything like this again.
• 10:33
  SPEAKER_02: 25% return, you won't get it.
• 10:35
  SPEAKER_02: So you said go in.
• 10:35
  SPEAKER_02: So I think it went in the minimum.
• 10:37
  SPEAKER_01: It did, so you put you put in a hundred or whatever a month or whatever it happens to be, and then you were guaranteed a 25% at the end.
• 10:43
  SPEAKER_01: And it was a great way of saving, it was a great way of taking money out of the economy because things were just big the things were just getting too hot, the spending was just too high.
• 10:53
  SPEAKER_01: And of course, the SSIs were going to mature in 2007, which there was, of course, a general election.
• 11:01
  SPEAKER_01: So, how did that happen?
• 11:02
  SPEAKER_01: It's as if it was planned.
• 11:04
  SPEAKER_01: So, you know, 2007 comes along, and people have 20 grand in their pocket or 10 grand, they're spending money on holidays, all sorts of stuff.
• 11:11
  SPEAKER_02: Everyone's in a gets spent money on the holiday, actually.
• 11:13
  SPEAKER_01: Everyone's a good everyone's in a good mood, and uh FINAFOL won an election, they probably wish they'd lost.
• 11:19
  SPEAKER_01: So, but anyway, uh in 2004, McCreevy was packed off uh to Europe for being a bit too cautious.
• 11:25
  SPEAKER_02: What job did he get in Europe?
• 11:26
  SPEAKER_02: Was it some finance?
• 11:27
  SPEAKER_01: Some oh, it was a commissioner job, yeah.
• 11:30
  SPEAKER_01: Big job though.
• 11:31
  SPEAKER_01: It was it was more than just your average European job.
• 11:34
  SPEAKER_01: Um, Bertie pulled a few strengths, Bertie wanted to get rid of them.
• 11:37
  SPEAKER_01: Um he was just too cautious, and he wants to bring in biddable uh Brian Cowan.
• 11:43
  SPEAKER_01: But let us at this point um move over to the other side to the Atlantic to America.
• 11:52
  SPEAKER_01: And uh subprime is is just it's one of those typical finance words that doesn't initially um every everyone's heard about it for the crash, but nobody knows what it means.
• 12:03
  SPEAKER_01: You you've heard about it, but I mean subprime essentially really means below below the best or below the below the standard, you know.
• 12:12
  SPEAKER_01: So um these were there was uh a feeling, and it goes it goes back some goes back some time that you know Clinton and but George W.
• 12:23
  SPEAKER_01: Bush, they wanted people from um particularly ethnic backgrounds like like um African American or um uh Hispanic Asian who weren't getting uh becoming property owners.
• 12:37
  SPEAKER_01: They wanted them to be no longer, you know, the those who could, they wanted them to be encouraged to to but to to buy property and get onto the property ladder.
• 12:45
  SPEAKER_01: And there was huge efforts to do this.
• 12:47
  SPEAKER_01: Prior to 1929, there was some changes made in by uh FDOR.
• 12:52
  SPEAKER_01: Um you know, loans were about five or six years, uh sorry, five to ten years maybe with a balloon payment.
• 12:58
  SPEAKER_01: So unless you were someone like Marcus Doyle, um there was there was no way that you were gonna afford property, and um, you know, we paid for Doyle Manor.
• 13:08
  SPEAKER_01: Exactly.
• 13:09
  SPEAKER_01: Um so look, there was efforts, you know, efforts made.
• 13:12
  SPEAKER_01: There's one uh the Federal Housing Administration kind of provided insurance on kind of loans, which made it a bit easier for for banks to to lend money.
• 13:21
  SPEAKER_01: Because when when a bank you know, if a bank lends us you know money for six weeks or you know, six months, you know, it's not too long to wait.
• 13:28
  SPEAKER_01: But mortgages, um I mean, are are we still getting 35-year mortgages?
• 13:32
  SPEAKER_01: Are we are we down to 30 now, 25, 30?
• 13:35
  SPEAKER_01: But it's it's still a long time, you know, and anything can happen in those periods, yeah.
• 13:42
  SPEAKER_01: Just there's people out there trying to get trying trying to get a mortgage and they're being refused.
• 13:46
  SPEAKER_01: And you know, they're they're let's say their rent is 1500, the mortgage, proposed mortgage is 1500, and they're kind of thinking, well, if I can pay my rent at 1500, then why can't I why can't I get a mortgage?
• 13:57
  SPEAKER_01: But what worries banks is that uh it's fine when things are going grand, but can you pay the mortgage when things go bad?
• 14:04
  SPEAKER_01: You know, could you survive six months or a year of unemployment, for example?
• 14:09
  SPEAKER_01: Um, could you still pay the mortgage?
• 14:10
  SPEAKER_01: So that's why banks are are are cautious.
• 14:13
  SPEAKER_02: Um especially with the current current rate of current economy at the moment, yeah.
• 14:17
  SPEAKER_01: Well, yeah, like I think generally speaking, generally speaking, they've always been pretty cautious.
• 14:22
  SPEAKER_01: Um, but there's been periods where they've been less so, and obviously, in terms of 2008, it's one of those one of those periods.
• 14:28
  SPEAKER_01: Troll money out.
• 14:29
  SPEAKER_01: But the um uh now I I I know the jokes might start right now, but there were two agencies called Fannie Mae and uh at Freddie Mac.
• 14:39
  SPEAKER_01: Sure, they're not porn star names.
• 14:42
  SPEAKER_02: I think you might have misread your notes there.
• 14:44
  SPEAKER_01: These are these are no, in fact, folks, these um I I'm sorry to say it's far less interesting that these are how semi-state housing bodies.
• 14:53
  SPEAKER_01: And what they do or their role is is to keep the housing market moving.
• 14:58
  SPEAKER_01: You know, so that if you, for example, let's just let's say the north side of Dublin, if we just took that as a region, if if banks weren't lending for mortgages, what they would do is they go to all the banks on the north side of Dublin and they would buy, take the mortgages off the market, a good chunk of them, take them off, and they'd hand the banks a check.
• 15:18
  SPEAKER_01: And so now the banks, their risks have gone way down because the people who could have defaulted, they're all gone now.
• 15:24
  SPEAKER_01: They're they're all belonging to this housing agency.
• 15:28
  SPEAKER_01: Like the vulture funds buying up the Bad Dash and the Irish Bank.
• 15:30
  SPEAKER_01: I suppose it is, but these these were except they wanted to make money on them.
• 15:33
  SPEAKER_01: These were good, yeah.
• 15:34
  SPEAKER_01: So there's a huge difference.
• 15:35
  SPEAKER_01: So these were government funds.
• 15:36
  SPEAKER_01: So if if Fannie Mayer, Freddie Mac buys a mortgage, then you you just pay them.
• 15:43
  SPEAKER_01: But they're just a government body, and those loans would just sit on it on the balance sheet of these massive, massive sending state companies.
• 15:50
  SPEAKER_01: And you know, if you if if you if ten people default, it's no big deal.
• 15:55
  SPEAKER_01: But for small regional banks, 10 people defaulting is is could be at the end being going out of business.
• 16:01
  SPEAKER_01: So so what they do is they just keep the the property market going, and it really has worked by and large, it's it's um it's worked very, very well.
• 16:09
  SPEAKER_01: But um, you know, it we we we still get back to the issue that uh that the banks have, which is what if this person who seems like a good bet, you know, uh on paper, what if they can't pay their loan?
• 16:25
  SPEAKER_01: You know, and so um a guy called uh Lutherinieri from a bank called Solomon Brothers, which Marcus, I'm sure you have heard of it.
• 16:35
  SPEAKER_01: There's a there's there's a great quote um from The Big Shorts, and it's that uh you might not know who he is, but he changed your life more than Michael Jordan, the iPod and YouTube put together.
• 16:47
  SPEAKER_01: So so this guy came along and he essentially uh copied what the uh Fannie Mae and Freddie Mac were doing.
• 16:54
  SPEAKER_01: He was going to regional banks or small banks and buying up these mortgages, and his attitude was simply well, you know, everyone pays their mortgage.
• 17:03
  SPEAKER_01: Um, and then these mortgages, let's say there's a thousand of them, are put into you know put into an investment structure, and that's then sold off to investors.
• 17:13
  SPEAKER_01: And these funds were making five or six percent a year because the default rates were very, very, very, very, very low.
• 17:21
  SPEAKER_01: Yeah, because people were paying their their mortgage.
• 17:23
  SPEAKER_01: People were paying their mortgages, such an a such an important thing.
• 17:26
  SPEAKER_01: So um the the the demand was just you know insatiable because as you know from from your work in in the field markets, like five to six percent return year after year after year is superb.
• 17:41
  SPEAKER_02: Oh, if you're getting the consistency and it's that consistency, yeah, yeah.
• 17:44
  SPEAKER_02: So um, you know, uh the it's people in my industry going, give me more of this, these investment products.
• 17:53
  SPEAKER_02: Give me more, yeah.
• 17:54
  SPEAKER_01: Give me more.
• 17:54
  SPEAKER_01: And and and so this is where where we are, where we're kind of in in 2004 in Ireland, and we're about we're about that point in in America.
• 18:04
  SPEAKER_01: And and at this point, these and they're called mortgage-backed securities, and obviously, folks, is the the language used for these uh products can be very daunting, but like they're they're just they're taking a bunch of mortgages and they're basically repackaging them and selling them off to someone else and making quite a lot of money um from it.
• 18:25
  SPEAKER_01: So I think um we might wrap there for today, Marcus.
• 18:30
  SPEAKER_01: Yeah.
• 18:31
  SPEAKER_01: Um we're we'll we'll we're this is one of two episodes.
• 18:34
  SPEAKER_01: You can take it up again, yeah.
• 18:36
  SPEAKER_01: Uh we're gonna have a look at the you know how the I suppose how the Irish, you know, banks and property, how that got going.
• 18:43
  SPEAKER_01: And uh we're also going to have a look at uh what happened again what further on in the States.
• 18:49
  SPEAKER_01: So we'll take we'll leave it there for today.
• 18:51
  SPEAKER_01: Thank you.
• 18:52
  SPEAKER_01: Thank you.