I thank the Chairman for his kind words. Mr. Watson and I are happy to be back and we thank the committee for the invitation. The committee will remember the mandate received from the Minister for Finance in February when we were asked to analyse the sources of Ireland's banking crisis. We have worked on that mandate for the past three months and the report has been delivered.
To prepare the report we had a series of meetings in Dublin and abroad. In Ireland we spoke with present and former bankers, central bankers, consumer representatives, Government officials, journalists, politicians, financial regulators, trade union representatives and members of the academic community. Outside Ireland we met representatives of the European Commission, the European Central Bank, the International Monetary Fund and the Bank for International Settlements. In all we met approximately 100 people during the three months to inform ourselves, and we assured the people that they were protected and we would not quote any source.
We also met the Governor of the Central Bank, Professor Patrick Honohan, on two occasions for a broad range of discussions. On the one hand we looked to avoid overlap between the two reports and we also sought to benefit from his insights because he has lived in Ireland, which we have not. He is a respected economist and our meetings were very useful in that respect. We did not try to co-ordinate the two reports but we are happy, now that Mr. Honohan's report has been published and we have read it, that the reports are complementary to each other. The committee will form its own judgment on that matter.
We were asked to consider the sources of the crisis in Ireland. I should clarify at the outset that the mandate to look at the sources of the crisis is not the same as answering the question of who is to blame for the crisis. That is something different. It would be quite easy to blame persons or institutions. It would be easy to say that the Central Bank should have rung the alarm bells earlier and louder. It would be easy to blame supervisors for not taking a more "hands on" approach. It would be easy to blame fiscal policy for being pro-cyclical. It would be easy to blame tax policy for providing the wrong incentives, or to blame bankers for ignoring risks.
All these statements would be correct, but they would miss a very important point. They would be too simple. To get the full picture of the sources of the crisis, one really has to take into account the international context in which the Irish economy operated over the past ten or 20 years. At an international level, we had monetary policies that were too loose, with too much liquidity, and pro-cyclical fiscal policies in many parts of the world. To get the full picture, one also has to take into account that the surveillance in the euro area was insufficient with respect to imbalances or competitive positions. One also has to remember that supervision worldwide was too lax during the period under review.
It is also important to remember that Ireland's economic developments during the preceding 20 years were very successful and that created a certain environment. This was a period in which European financial markets integrated very strongly, with very important implications for interest rates and the availability of liquidity and funding. Irish society has a strong preference for real estate, and that added to some of the developments. It is very important to see the interaction of all these elements, so it would be far too easy to pick one or two persons and institutions and blame them. It is important to understand how the global and the domestic Irish macro-economic situation interacted, and how the different factors contributed to the crisis in a comprehensive way.
I will now highlight the key points in our report. The first point deals with the international environment in the past two decades and the second point deals with specific issues related to Ireland. I will begin and Mr. Watson will take over at certain stages.
It is important to look at the global and European setting, because it is there we could see mutually reinforcing interaction between global developments and national policies. In the 1990s we had a worldwide phenomenon called "The Great Moderation", with strong growth and low inflation, and low interest rates as a result. We argue in the report that this benign inflation environment led to monetary policy mistakes. Key interest rates around the world were too low for too long. This situation was amplified by exchange rate policies in major economies, including China, which fuelled global liquidity. That contributed to the increase in global imbalances, which again put downward pressure on interest rates and risk spreads. This monetary environment eventually led to strong rises in asset prices in many parts of the world and to a succession of bubbles in equity, bond, housing, commodity and credit markets.
The other key worldwide macro-economic problem was in fiscal policy, which was too loose and pro-cyclical in many parts of the world. It was excessively expansionary, particularly outside the euro area, but it happened in important countries.
It is also important to remember that there is an excuse for policy makers. It is easy with hindsight to identify mistakes made on the monetary policy side and on the fiscal policy side. On the fiscal policy side, we have to admit that our methods for assessing the fiscal stance in real time, which is what policy makers have to do, is not easy. Our tools are not very good in that respect. The experts — we consider ourselves to be part of that community — have been working on this and continue to work on it to improve these methodologies to have a better understanding of the underlying structural fiscal situation. It is not easy. Work is ongoing. That is the international macroeconomic context and Mr. Watson will comment on the global context before we move to Ireland's specific issues.